Understanding financial advice
Financial life goals
Tools and resources
Products and services
Investing with IOOF
Your retirement goals
By Janet Manzanero-Caruana, Senior Technical Manager
From financial year (FY) 2021-22 the general transfer balance cap will increase.
This article covers:
The transfer balance cap (TBC), indexed to the Consumer Price Index (CPI) in $100,000 increments, will increase from $1.6M to $1.7M. The new $1.7M TBC will allow more superannuation interests to be rolled over to retirement phase (RP) income streams and allow more of your clients to make non-concessional contributions (NCCs). This is because the total superannuation balance (TSB) threshold at which the NCC cap is nil for the financial year, will increase to $1.7M. For this purpose the TSB is taken at 30 June of the previous financial year.
This means eligible clients can contribute more to superannuation.
While this is great news for clients, the increased general TBC will create more complexity for you as an Adviser. You will need to take extra care in establishing the correct transfer balance account (TBA) amounts for your clients who may have transfer balance caps between $1.6M and $1.7M from 1 July 2021.
As a result of the increase in the general transfer balance cap, the defined benefit income cap will also increase to $106,250 per annum in FY2021-22. This means certain recipients of capped defined benefit income which is in excess of a total of $100,000 per annum will benefit more from tax concessions.
RP income stream accounts enjoy the benefit of tax free income. Since 1 July 2017 the $1.6M TBC has limited the total superannuation a member can use to commence RP income streams. The $1.6M TBC will continue to apply to members who have used 100% of their TBC any time before 1 July 2021. The $1.7M TBC will apply to those who have not yet commenced an RP income stream (have no TBA) when this change takes effect on 1 July 2021.
While it is easy to establish TBCs for the above-mentioned, it is not the case for clients who commenced RP income streams prior to FY 2021 and not used 100% of their TBC. These clients will have TBCs between $1.6M and $1.7M because indexation will apply only to the portion of the TBC that was never used. In other words, indexation takes the highest ever balance in your TBA (not the balance just before indexation) and using that amount to calculate the unused cap percentage of your TBC, multiplied by $100,000 (see example 1 below).1
Carmen has the following transactions reported in her transfer balance account:
1 July 2017 - Had account-based pension #1 with a balance of $400,000
1 July 2018 - Commenced account-based pension #2 with $500,000
1 July 2019 - Commenced account-based pension #3 worth $300,000
30 June 2021 - She commuted $200,000 from account-based pension #1, causing her transfer balance account balance to reduce to $1,000,000.
Transfer balance account
Carmen’s highest TBA balance was $1,200,000 therefore the TBC that was not yet used is $400,000 or 25% of $1,600,000. Carmen’s TBC increase will be $25,000 (25% of the $100,000 increase). Carmen’s TBC at 1 July 2021 will be $1,625,000 ($1,600,000 + $25,000).
A member’s NCC cap is nil for the financial year where their TSB (which includes the balances of their pensions, accumulation accounts and any rollovers between these accounts) at the end of 30 June of the last financial year equals or exceeds the general TBC. As a result of the increase of the general TBC to $1.7M more members can make NCCs in FY2021-22. Eligible members on low income who have TSBs between $1.6M but less than $1.7M will be able to top up their super and receive the Government co-contribution and/or spouse contribution if they meet requirements, for example, members who are retirees, on maternity leave, or on a career break.
Income from capped defined benefit income streams which are generally non-commutable, referred to as defined benefit income, can benefit from tax concessions up to the defined benefit income cap for recipients who:
The defined benefit income cap is calculated as:
The general transfer balance cap/16
The increased general TBC increases the defined benefit income cap from $100,000 pa in FY2020-21 to $106,250 pa in FY2021-22. This is derived from:
Those who currently receive defined benefit income in excess of $100,000 per annum will have up to an additional $6,250 of that income benefit from tax concessions from 1 July 2021.
Defined benefit income is counted towards the defined benefit cap in the order below:
Albert, aged 65, receives $150,000 in FY2020-21 from a capped defined benefit pension with the following tax components:
The tax free and taxable (taxed) components ($40,000) count first towards the defined benefit income cap and are received tax free. The taxable (untaxed) component ($110,000) is taxed at Albert’s MTR. The taxable (untaxed) component within the defined benefit income cap is $60,000 ($100,000 - $40,000), therefore the 10% tax offset arising is $6,000 in FY2020-21.
In FY2021-22 Albert’s defined benefit pension increases to $155,250 per annum. The defined benefit income cap has also increased from $100,000 to $106,250. The new capped defined benefit pension tax components are:
The tax free and taxable (taxed) components equal $41,400 and are within the income cap, so are received tax free. The taxable (untaxed) component is $113,850 and taxed at Albert’s MTR. The taxable (untaxed) component within the defined benefit income cap in FY2021-22 is $64,850 ($106,250 - $41,400), therefore the 10% tax offset arising is $6,485 in FY2021-22.
The increased general TBC and TSB will be good news for clients who wish to accumulate more retirement savings enjoying generous tax concessions.
However these changes also add complexity for clients who wish to commence RP income streams because TBCs will have to be recalculated for certain clients.
Advisers must confirm exact TBCs and TSBs before recommending RP income streams and NCCs to avoid miscalculation, which could lead to an unexpected tax outcome.
1 Those currently receiving child pensions will not have an increased child death benefit TBC increment. However, if they receive their own RP income stream, their personal TBC may increase if they have not used 100% of the $1.6M TBC at any time before 1 July 20212 The TSB also includes certain SMSF Limited Recourse Borrowing amounts and reduced by any personal injury contributions.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.DisclaimerThe information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.