The extent to which the transfer balance cap (TBC) indexation applies to an individual is determined by the peak recorded level of an SMSF member’s transfer balance account (TBA) amount, effectively eliminating any scope to manipulate the system, a sector specialist has said.
Speaking at the SMSF Virtual Day 2021 hosted by Smarter SMSF, SuperGuardian education manager Time Miller told delegates: “The indexation will occur not based on the balance in your transfer balance account at the time that indexation [was implemented], 1 July 2021, but we have indexation based on your highest [TBA amount] at any point in time within the [time the] transfer balance cap [was introduced].”
Miller pointed out this means an individual’s TBA cannot be manipulated to allow that member access to a greater portion of the indexation sum applied to the general TBC.
He illustrated this feature of the system using an example where an individual had commenced a $1.2 million pension during the 2021 financial year. This means the person would have used up 75 per cent of their TBC, leaving them an unused TBC portion of 25 per cent. Applying this to the indexation increase of $100,000, the member in question would be entitled to an indexation increase in their TBC of $25,000.
Under the indexation rules this result would not change if the SMSF member partially commuted their pension by $400,000 before 30 June 2021, leaving them with a TBA of $800,000, he pointed out.
“We have to take our highest [TBA] balance to determine what our unused cap percentage is, so in this instance, even though at the time of indexation our transfer balance account is $800,000, it looks as if we’ve got 50 per cent cap space, we’ve actually peaked at $1.2 [million], meaning our cap space is 25 per cent, which means the indexation is based on that,” he noted.