TBC indexation may mean moving thresholds

TBC indexation

Possible indexation changes to the transfer balance cap will create irregular changes to contribution caps that may affect bring forward strategies.

SMSF practitioners will need to pay close attention to how transfer balance cap (TBC) indexation from 2021 onwards will impact the total super balance (TSB), and concessional contribution (CC) and non-concessional contribution (NCC) caps, as any changes are likely to vary each year and can’t be applied universally, according to a technical manager.

SuperConcepts SMSF specialist Anthony Cullen noted while no indexation has been applied to SMSFs since the wide-ranging reforms of 2017, it was likely to take place during 2021 impacting the TBC as well as the CC and NCC caps but that this alignment would not occur every year.

“We may find overtime that we’re having indexation at different points in time given the current rates of increase to the Consumer Price Index (CPI) and Average Weekly Ordinary Time Earnings (AWOTE)”, Cullen said, recognising the CPI would be used to index the TBC and AWOTE to index contribution caps.

“If we spread those figures out over the next 10 years there are periods where we get changes just to the concessional cap but not the transfer balance cap, and vice versa. So what that means is non-concessional and concessional caps change, as does the TSB for bring forward purposes,” he added.

Cullen explained if the TBC and concessional caps changed in 2021 as a result of indexation, the TSB that applies to a three year bring forward period would increase from less than $1.4 million to less than $1.48 million, and the cap for a two year bring forward period would increase to less than $1.59 million, while the cap for a one year bring forward period would increase to less than $1.7 million.

“What happens if as a result of COVID-19 we get an increase in the concessional cap but not the transfer balance cap, then we’re only getting indexation on one side and then over the years those figures could change again and everything happens at different points in time.

He pointed out in this case the TSB for the three year period would fall to less than $1.38 million, the TSB for the two year period would become less than $1.49 million and the TSB for the one year period would be less than $1.6 million.

“It gets to that point if our strategies work on what we know the law is at the moment or do we wait for indexation or do we wait till we get the details whether we’re going to get indexation or not.

“That’s why it’s vital that we keep an eye on what’s going on and what’s potentially going to happen in the future, because it’s going to have a big impact on whether we can potentially use the three year or the two year rule, or potentially not be able to put any contributions in at all,” he advised.

During the same presentation, Cullen also warned that indexation should not be considered in isolation when setting SMSF contribution strategies and for SMSF practitioners to consider a wide range of factors when providing strategy advice.

In December, the ATO stated the indexation of the TBC would occur on 1 July 2021 if the CPI figure for the December 2020 quarter was 116.9 or higher. The CPI figure for the September 2020 quarter released on 28 October was 116.2.

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