Arguably the biggest change from the July 2017 superannuation reform measures was the introduction of the Transfer Balance Cap (TBC), which effectively limits the total amount of your retirement savings that can be moved into a pension account.
This cap was initially set at $1.6 million but is subject to indexation in line with inflation in $100,000 increments.
The first indexation event occurred on 1 July 2021 when the cap was increased to $1.7 million. The next indexation took place on 1 July 2023 when, due to the rapid increase in inflation in Australia over the past two years, the TBC increased by $200,000 to $1.9 million.
Outcomes and opportunities from indexation
The increase to the general transfer balance results in strategic opportunities for you to consider and, where appropriate, implement in accordance with your super fund rules.
These opportunities include:
1. Move additional amounts into retirement phase
For those approaching retirement, the indexation to the general TBC allows you to commence a retirement income stream (pension) from 1 July 2023 with more of your accumulation balances; essentially an additional $200,000 in the tax-free pension environment.
For those already in retirement, an increase to the TBC could allow you to now move additional amounts from your accumulation account into retirement phase, depending on your personal circumstances and how much of your personal transfer balance cap you have already used.
For instance, if you have previously used 100% of your personal TBC, then you would not be eligible for any level of indexation. However, where you have only used part of your personal TBC, then you are eligible for partial indexation.
2. Make additional non-concessional contributions (NCCs)
Where your Total Super Balance (TSB) on 30 June is less than the general TBC, it allows you to make use of certain super contribution opportunities in the following financial year. So, a higher TBC post indexation would allow those with higher total super balances to make further contributions that were not previously allowed.
These opportunities include the eligibility to make further NCCs to your super fund, receive a government co-contribution, claim a tax offset for the contributions you make to your spouse’s super account and could even allow access to the three-year bring-forward rule for non-concessional contributions.
3. Rebalance member accounts
The ability to make further NCC’s could also allow the rebalance and equalisation of spouse balances held in super.
This can be achieved by withdrawing an amount from one member’s balance and then recontributing these amounts into their spouse’s super account where the balance can then be converted into a pension.
By doing this, both members of a couple can maximise the balances they hold in the tax-free retirement phase of super rather than being forced to hold accumulation balances that would be subject to tax on earnings.
If planned carefully, couples starting a super pension on or after 1 July 2023 can effectively share $3.8 million in tax-free pension balances.
Prior to the indexation of the TBC, it may be that you were not eligible to make further non-concessional contributions where your total super balance may have exceeded the general transfer balance cap. The upcoming indexation may open up this strategic opportunity for you and/or your spouse.
Further opportunities for SMSF members
The TSB and TBC rules are not unique to SMSFs as they apply the same way for most types of super funds so the non-concessional contribution and pension opportunities mentioned earlier could benefit members of most super funds. However, there are other strategic opportunities that are unique to members of SMSFs.
Delay the sale of SMSF assets
Where SMSF trustees are considering the sale of a fund asset, it may be worth considering delaying that sale until after indexation of the cap when the fund members could hold significantly higher balances in the tax-free retirement phase and significantly lower balances in the accumulation phase.
This could be effective in reducing any capital gains tax that may apply on the sale of the fund’s assets.
The example shows how this strategy operated when the cap was indexed on 1 July 2023, but can be applied in the same way when the cap is indexed in future years.
For those approaching retirement, you could consider using the in-specie contribution rules that allow you to move certain assets such as listed shares or commercial property that you personally own into your SMSF as a contribution.
With the effects of indexation flowing through to the rules around non-concessional contributions, you may now be eligible to make use of the three-year bring-forward rules from 1 July 2023, which could allow these larger assets to then be moved into your SMSF.