SMSF practitioners need to be aware that rounding is used when calculating the space remaining under a personal transfer balance cap (TBC), but it must be applied to the right part of the equation to generate the correct result, according to Heffron SMSF specialist Sean Johnston.
Johnston highlighted the issue during a recent online question and answer session for the firm’s clients whereby a practitioner was trying to identify the cap space for a member who started a pension on 1 July 2024 with an amount of $1.871 million, when the general TBC, and that of the client, was $1.9 million.
“I’m going to walk through the methodology here and on 30 June prior to the date the general TBC is indexed, we have to identify the highest transfer balance account ever of the client, which is the amount they’ve used to start this pension – $1.871 million.” he said.
“We now express that as a percentage of that person’s individual TBC and in this case that is easy because it was also the general TBC at the time, and that gives us 98.52 per cent of $1.9 million.
“We round that result down and get 98 per cent as the figure for the cap space that this client has utilised. Her unused space therefore is 2 per cent and she will get 2 per cent indexation on $100,000, or $2000.
“The new personal TBC from 1 July 2025 will be $1.902 million and that means she’ll have about $30,000 worth of cap space available to her.”
Johnston pointed out the issue here is practitioners miss the rounding downing of the percentage of the personal TBC or apply it to the wrong figures.
“The rounding part gets a lot of people because they usually round to the nearest per cent rather than rounding down, or they round on the unused cap portion rather than the amount that you’ve utilised,” he explained.
“One of the things I will say about indexation is that was a very simple calculation because we were dealing with indexation once [when the TBC increased to $2 million on 1 July 2025], and the client only had one TBC entry.
“Some of your clients will have now had three rounds of indexation when we went from $1.6 million to $1.8 million to $1.9 million to $2 million.
“With three rounds of indexation you might have multiple TBC movements so remember, it’s always the maximum amount of TBC you’ve ever used as a proportion of your whole balance, not just your current balance.”
