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Changes to the superannuation transfer balance cap from July 1, 2021

Changes to the superannuation transfer balance cap from July 1, 2021

The superannuation transfer balance cap started on July 1, 2017 when the government introduced that a maximum of $1,600,000 can only be commenced in a retirement phase account-based pension (ABP).

A retirement phase ABP is a pension that is paid when the member has reached 65 years of age or they have met a condition of release (and they are over their preservation age).

As a result of changes to the legislation from July 1, 2021, the amount allowed to transfer into an ABP is set to increase with indexation from $1.6 million to $1.7 million.

If at any time prior to July 1, 2021 a member had a transfer balance account of $1.6 million or greater, their personal transfer balance cap will not be increased. This also means that (from July 1, 2021) any member who had not previously started an ABP will have a transfer balance cap of $1.7 million. Furthermore, if any member had started an ABP under $1.6 million prior to July 1, 2021 then they will get a pro rata increase of their transfer balance cap.

The formula to calculate a member’s transfer balance cap if they commenced an ABP under $1.6 million prior to July 1, 2021 is:

Transfer balance cap = $1.6 million + ($100,000 x unused transfer balance cap %)

This formula shown in Example 1 below is provided on the Australian Taxation Office’s (ATO) website in relation to these changes:

Example 1:

Nina started a retirement phase income stream with a value of $1.2 million on October 1, 2018.

There are no other events in Nina’s transfer balance account. The highest ever balance in her transfer balance account is $1.2 million.

Nina’s unused cap percentage is 25 per cent of $1.6 million.

Nina’s personal transfer balance cap will by indexed by 25 per cent of $100,000.

Nina’s personal transfer balance cap after indexation on July 1, 2021 is $1.625 million.

Percentage minimums in relation to transfer balance caps

An ABP has the tax benefit that the superannuation fund’s investment income is tax free.

There is no maximum pension payable for an ABP in that the whole balance can be paid out.

There are reporting requirements in relation to starting an ABP to the ATO, known as Transfer Balance Account Reporting (TBAR), as well as reporting requirements regarding any commutations of the pension.

As a reminder, a superannuation fund must pay the required minimum pension by June 30 each year, being:

Age Minimum percentage 50% reduction for 2019-20 and 2020-21
< 65 4% 2%
65-74 5% 2.5%
75-79 6% 3%
80-84 7% 3.5%
85-89 9% 4.5%
90-94 11% 5.5%
95 + 14% 7%

The 50 per cent minimum pension reduction for the 2019-20 and 2020-21 financial years was in relation to the financial impact of COVID-19. From July 1, 2021, the pension minimum percentage will go back to the normal percentage.

If the ABP minimum is not paid by June 30 then the superannuation fund’s tax-free income status is lost for that financial year.

Additionally, as a result of indexation, the ability to make tax-free contributions in relation to a member’s balance will also increase from having to have a total superannuation balance (TSB) under $1.6 million to under $1.7 million from July 1, 2021.

Need help navigating changes to the transfer balance cap?

The transfer balance cap rules are complicated, and we strongly recommend that you seek professional advice prior to commencing an ABP.

Our superannuation experts at LDB are here to help advise and guide you through any changes. Give us a call on (03) 9875 2900 or send us a note via the contact form below.

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