In July 2017, the government introduced a limit to the amount of tax-exempt pension accounts that retirees can have. This threshold was named the transfer balance cap (TBC) and the initial threshold amount was $1.6m. At the time, the government announced that it would increase the threshold in $100,000 increments with inflation over time. That is to say, the cap will only rise when the inflationary effect exceeds the increment of $100,000. Between 1 July 2017 to 2020, this condition was not met (i.e. the inflation rate over this period did not match the $100,000 increment). In the December quarter of 2020, the inflationary requirement to increase the cap was reached, thus from 1 July 2021, the new TBC will be $1.7m.
The rules surrounding the increase are very complex and does not simply mean that everybody can increase their tax-free pension by another $100,000. For example, if the person had met the maximum threshold of $1.6m before 1 July 2021 and did not have any commutation, their TBC does not increase, and they cannot add anymore. The way that the ATO will increase to each personal TBC is through a proportional calculation. The proportion of the unused cap between the person’s highest transfer balance and $1.6m will be converted into a percentage. This percentage will be applied to the $100,000 increment to calculate the dollar amount increase to $1.6m that will be the person’s TBC after 1 July 2021.
Increase to TBC= (1-(Highest transfer balance)/$1.6m)×$100,000
For example, if Nina had a transfer balance of $1.2 million on 1 October 2018 and there were no other transactions in her transfer balance account, her highest balance will be $1.2 million. Her unused cap percentage is 25% and the increase to her TBC will be $25,000. Nina’s personal TBC after 1 July 2021 will be $1.625m.
Consistent with ATO guidelines:
- If you have never had a pension before 1 July 2021, your personal TBC will be $1.7m
- If you have had a pension before 1 July 2021:
* If the balance of the account ever reached the maximum of $1.6m, you do not receive any increase and your personal
TBC remains at $1.6m
* In all other cases, your personal TBC will be between $1.6m and $1.7m, based on the proportional calculation explained
Before 1 July 2021, the highest ever balance in your transfer account can be viewed in ATO online. After July 2021, your personal TBC will be available in ATO online.
Indexation of the general transfer balance cap will also affect other caps and limits, including non-concessional contribution caps and changes to co-contribution and spouse tax offset.
The total superannuation balance cap will increase from $1.6 to $1.7m, increasing the non-concessional contributions cap to $110,000 and maximum bring forward amount to $330,000. Furthermore, in line with the increases in average weekly ordinary time earnings (AWOTE), the concessional contributions cap is due to increase from $25,000 to $27,500 from 1 July 2021. Again, everyone will have different thresholds depending on their circumstances.
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Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It's also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.