Transfer Balance Cap reporting – Revisiting this 6-years later.

1 July 2017 saw some significant changes to superannuation with the introduction of the Transfer Balance Cap. This cap, designed to ‘provide income in retirement to substitute or supplement the Age Pension,’ puts a limit on the amount of money in super that enjoys the 0% tax rate. 

To re-cap, once an individual has met a full condition of release and commences an income stream from their super fund (i.e., now in ‘Pension mode’), all future earnings from this day forward (income and capital gains) are tax-free. However, if your balance when you started this income stream was >$1.6m (i.e., the Transfer Balance Cap), from 1 July 2017 the excess remains in ‘Accumulation’ mode and earnings remain taxed at 15%. If your balance was <$1.6m, then nothing changes as all future income and growth will remain tax-free. 

What does this mean in practice? For those balance that were >$1.6m, lets look at the below example:
Tom, aged 66, on 30 June 2017 had a total super balance of $2 million which was 100% in pension phase. His fund generated a net 7% income (income less costs) totalling $140,000. The tax he paid for the year ended 30 June 2017 was $NIL.
From 1 July 2017, Tom’s pension phase account is now reduced to $1.6m and has an accumulation balance of $400,000 (total super balance remains at $2m).
For the 2018 financial year, the pension phase balance generated a net return of 8% and paid $NIL in taxes. The accumulation balance generated a net return of 7% ($28,000) and paid $4,200 (15% of $28,000) in income tax. All things being equal, Tom will pay an additional $67,200 in income tax over his remaining life-expectancy.

As highlighted in the above example, Tom is now paying additional income tax because of this legislative change.

What about future growth?
This Transfer Balance Cap is not a ‘hard limit’, and what is meant by that is it does not restrict future earnings or growth. What we sometimes see, depending on returns and spending, capital grows over time. So, this $1.6m initial balance could increase to $1.7m (and also reduce to below $1.6m), however, there is no requirement to bring this balance back down to the original balance. Using Tom as our example again, on 30 June 2018, his Pension balance increased to $1,650,000. Even though this exceeds the ‘Cap’, Tom is not required draw the excess $50,000 from super. He can leave it there. However, if Tom’s pension balance on 30 June 2019 reduced to $1,550,000, he cannot use any of his remaining accumulation balance to ‘top-up’ his pension balance. Once this Cap has been used, it is set at that date and balance for the remainder of your pension regardless of the future value changes.

The Indexation of the Transfer Balance Cap
The Federal Government at the time made provisions in this total transfer balance cap, as inflation increases so should this ‘cap’. This cap is indexed to the nearest $100,000 based on the December All Groups CPI. Since its inception in 2017, this cap has already been increased once to $1.7m and from 1 July 2023, we will see this increased to $1.9m. Is this good news? Like all things, it depends.

For those yet to meet a full condition of release, or near to reaching one, it is good news. It means there is an additional $300,000 of capital that can enjoy tax-free growth and earnings for the remainder of their lives.

For those that have already used some of the cap, then there is still a silver lining. You get a proportional increase of your cap in line with what has been used. For example, if you used 50% of the initial cap of $1.6m, you would receive 50% of subsequent increases ($300,000 x 50% = $150,000) bringing your new transfer balance cap amount to $1,750,000 from 1 July 2023. Whilst this may not be of major importance at this stage, future inheritances, windfalls or passing wealth between spouses means this increase becomes relevant again.

If you have already used your entire transfer balance cap from 1 July 2017 to date, then you are no longer eligible for any increases. Even if your current balance is less than $1.6m, there is no chance of ‘topping’ your pension balance back up. As Advisers, we are on the lookout for opportunities that, even though they may not allow us to increase the total cap itself, allow for additional wealth to be kept within super and transferred into Pension phase. 

What Next?
If you would like to hear more about this topic, please check out our website, social media or book in for a complimentary discussion with one of our Advisers. We look forward to making your retirement journey easy.