Higher super caps in July:
But beware the detail
It’s worth remembering that the Consumer Price Index (CPI) is relevant to all retirees, not just those receiving an Age Pension. Increases in the CPI can also trigger major changes in superannuation rules for those who are self-funded. This is what has just happened with Transfer Balance Caps, starting 1 July 2023.
Transfer Balance Caps
Caps on superannuation can be complex, so here is a short overview of the changes and whether you might stand to gain.
Firstly, let’s look at what Transfer Balance Caps (often called TBCs) are and what they are not.
They have nothing to do with contribution caps – either before or after tax – for funds invested in your super. TBCs, instead, are caps or limits to the amount that you can transfer from an accumulation fund into an Account Based Pension when you decide to convert your super to decumulation or pension mode. Whilst the tax on the earnings on your super in the accumulation phase is 15%, the tax on earnings in Account Based Pensionss is nil. So clearly those with the means are keen to place as much as possible into a retirement pension where the earnings aren’t taxed.
In 2016 a flat limit of $1.6 million was placed on the transfer of such funds. This amount, however, is subject to inflation. When inflation is factored in and the amount goes over the next $100,000 mark, then the cap is increased from the following 1 July. This happened on 1 July 2021, when the the cap moved to $1.7 million. The December 2022 quarter inflation results now mean, with a 7.8% increase to CPI, that the cap will move to $1.9 million on 1 July 2023.
But, as always, the devil is in the detail.
For those who have already transferred a certain amount across into a decumulation pension, the full 1.9 million cap will not apply. A proportion of the amount may apply, it depends on how much you have in accumulation and how much in your Account Based Pension Transfer Balance Caps are described by the ATO as a ‘personal’ cap. It is therefore very important to seek advice before assuming how much you may now move into an ABP.
The change to the TCB may mean that some people who are considering retirement this year will hold off until 1 July, as, if they go earlier, they will need to comply with the current cap of $1.7 million and factor in possible adjustments, assuming the cap is lifted on 1 July.
And therein lies the rub. Whilst this indexed increase is legislated, there is speculation that the government may not wish the cap to rise by $200,000. Some commentators believe that Financial Services Minister, Stephen Jones, may wish to curb this indexation or remove it entirely in the May 2023 Federal Budget.
Watch this space.
More information from the Australian Tax Office (ATO) on Transfer Balance Caps
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What about you? Do you find discussions of changes to TCBs confusing? Or do you believe the indexation these personal caps is a fair way to manage decumulation transfers?