From 1 July 2023, the general Transfer Balance Cap will increase from $1.7 million to $1.9 million. What you need to know to qualify and important tax considerations.
Australia's superannuation system has recently been the subject of much debate. While much of the discussion has centred on proposed changes, one significant change will be implemented on 1 July 2023 - the general Transfer Balance Cap (TBC) will increase from $1.7 million to $1.9 million through indexation.
What is the Transfer Balance Cap?
The TBC limits the total amount of superannuation savings that an individual can transfer to the retirement phase, which includes a pension account. An individual’s ‘personal TBC’ is calculated by reference to the ‘general TBC’, prevailing at the later of 1 July 2017, or when they first start receiving a retirement phase pension. An individual commencing a retirement phase pension for the first time, on or after 1 July 2023, will have a personal TBC of $1.9 million (a combined total of $3.8 million for a couple).
From a taxation standpoint, it is beneficial to maximise the amount of superannuation savings in retirement phase pensions, as income and capital gains generated from assets that exclusively support these pensions are tax-free in the superannuation fund.
Who will be imapacted by changes to the Transfer Balance Cap?
It is worth noting that the indexation increase in the TBC may not be available to all individuals, and it is recommended that eligibility is confirmed before taking any action. If an individual has not fully utilised their personal TBC and the general TBC increases due to indexation, they will benefit from that indexation on a proportional basis.
For example, if an individual has previously used 70 per cent of their personal TBC, their unused cap percentage will be 30 per cent. If the general TBC subsequently increases by $200,000 (from $1.7 million to $1.9 million), their personal TBC increases by $60,000 ($200,000 x 30%), and they now have a personal TBC of $1.76 million. Note that an individual who has fully utilised their personal TBC does not benefit from the indexation of the general TBC.
On this basis, the indexation of the TBC to $1.9 million appears to be good news for anyone considering establishing a retirement-phase pension or anyone who has not yet fully utilised their personal TBC.
Once we know an individual’s TBC, we can begin strategising to maximise the benefits. In the context of the indexation increase, several strategies have emerged, some of which include:
- Assessing the taxation implications of commencing a pension this financial year (during which you may have a lower TBC), as opposed to the next financial year (during which you may have a higher TBC)
- Determining the ability of a couple to maximise the combined value of superannuation account balances in retirement phase.
It is worth noting that the indexation increase to the TBC can have additional implications beyond pension and taxation. Specifically, individuals who were previously unable to make certain contributions to their superannuation because their Total Superannuation Balance (TSB) was $1.7 million or more, may be eligible to make those contributions from 1 July 2023. It is important to understand this change in detail, assess its impact and take action to give effect to any pension and contribution strategies that are relevant.
Due to the complexities of superannuation and taxation laws along with provisions of any relevant documents (e.g. trust deeds, pension agreements and death benefit nominations), assessing the personal impact of this change is complex.
BDO can assist with:
- Calculating your TBC as at 1 July 2023
- Understanding if your family’s superannuation balances can be equalised
- Calculating the optimal taxation outcomes associated with commencing a pension in this or the next financial year
- Determining the maximum contributions able to be made during this and next financial year.
If you want to understand the changes to the Transfer Balance Cap in greater detail, please contact your local BDO Superannuation adviser.
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