By Annabelle Dickson

The Australian Taxation Office (ATO) is alerting superannuation trustees to plan for a number of changes in regard to the indexation of the general transfer balance cap, which will be particularly important for SMSF trustees.

The transfer balance cap is expected to rise to $1.7 million on 1 July 2020 in line with the consumer price index (CPI), bringing changes to the limits of non-concessional contributions, co-contributions and spouse offset.

The cap is currently $1.6 million of the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase. Retirees commencing a retirement phase income stream after indexation will have the full increased transfer balance cap of $1.7 million. However, for those who have already commenced a retirement phase income stream, the cap will be proportionally indexed based on the highest ever cap balance.

Peter Hogan, head of technical at SMSF Association says: “It is complex because everyone’s transfer balance cap will be different. You can only index the unused amount of the transfer balance cap.”

The ATO says it will calculate the entitlement to indexation and the personal transfer balance cap after indexation, based on the information reported to and processed by them when indexation occurs.

In the case that the balance in the transfer balance account was $1.6 million or more after 1 July 2017 and between the time of indexation, the cap will not increase. Graeme Colley, executive manager, SMSF technical and private wealth at SuperConcepts, says that these changes will affect all superannuation members in pension phase but may affect SMSFs more due to members having higher non-concessional contributions and larger total superannuation balances.

Hogan agrees and says it is important that SMSF trustees understand how much they have used and apply the indexation to what is unused. Colley says: “What may happen with SMSFs is that members will continue putting in contributions as they always have been and may forget about the rules, so mistakes can arise. The ATO is sensible in getting this information out now for the potential indexation to try and avoid that.”

The total superannuation balance limit which determines if an individual is not allowed to make non-concessional contributions will increase from $1.6 to $1.7 million.

In addition, an individual qualifying for a co-contribution entitlement will cut out when their total superannuation balance reaches $1.7 million and above. The limit that excludes an individual from claiming the tax offset for superannuation contributions they make on behalf of their spouse will rise from $1.6 to $1.7 million.

Despite the limits increasing to the same amount, there is a disparity in the way that the contributions are indexed. Colley says: “The transfer balance cap is indexed at CPI but the concessional and non-concessional contributions are indexed at changes in average ordinary times earnings (AWOTE). AWOTE indexation occurs at a greater rate than CPI in nearly all situations.” Hogan agrees: “CPI is less generous than AWOTE and takes longer to get to the same level.”

If indexation does not occur on 1 July 2020, the ATO anticipates it will occur on 1 July 2021

Annabelle Dickson is a journalist at The Rub and The New Investor.