Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 401

Indexation complication! Four changes you need to know

Several superannuation thresholds will be indexed from 1 July 2021. In this article we will review the thresholds that impact retirement pensions and contributions.

1. The transfer balance cap

The transfer balance cap limits the amount of superannuation that an individual can use to commence a pension, where the investment returns are generally tax free. It was introduced from 1 July 2017 at $1.6 million and from 1 July 2021 it will increase to $1.7 million.

The transfer balance cap is indexed to the consumer price index in $100,000 increments. However, unlike many other thresholds, not everyone will be able to transfer an additional $100,000 into retirement pension phase. Rather, there is a complex formula used to determine if an individual has any ‘cap space’ and can therefore move additional benefits to retirement phase pensions.

The transfer balance account is a series of debits and credits that track changes in pensions, most commonly a credit for the commencement of a pension and a debit for the commutation of a pension. The transfer balance account can be negative.

Since 1 July 2017, all individuals have had a personal transfer balance cap of $1.6 million, which equals the general transfer balance cap. From 1 July 2021, anyone who has commenced a retirement pension of less than $1.6 million will have a personal transfer balance cap that is different to the general transfer balance cap. This will make it more confusing for individuals to understand how much they can use to start additional pensions.

Firstly, if a person had a retirement pension at 1 July 2017 or has subsequently commenced a pension for $1.6 million then they have no cap space and cannot use any additional funds to commence a retirement pension. At least that part is relatively straightforward.

For individuals who have commenced a retirement pension of less than $1.6 million, there is a five step process to calculate their personal transfer balance cap:

  1. Identify the highest balance of the transfer balance account
  2. Identify the general transfer balance cap at the time of the highest balance of the transfer balance account
  3. Calculate the proportion of the cap that was unused at that time
  4. Multiply the indexation of the general cap by the percentage from 3 above
  5. Add to the personal transfer balance cap

The Australian Taxation Office will calculate everyone’s personal transfer balance cap which can be accessed via an individual’s myGov account.

Case study - Martin

Martin started a pension with $1 million on 1 July 2018. By July 2021 his pension has increased in value to $1,100,000. Martin received an inheritance and has made non-concessional contributions and a downsizer contribution. He wants to know how much he can use to start a second pension.

Martin’s personal transfer balance cap is calculated as:

Calculation steps

Calculation

Value

Highest TBA balance

 

$1,000,000

TBC at highest TBA balance

 

$1,600,000

Highest cap proportion

$1,000,000 / $1,600,000
rounded down to whole number

62%

Unused cap proportion

100% - 62%

38%

Proportion of indexed amount

38% x $100,000

$38,000

Total TBC

$1,600,000 + $38,000

$1,638,000

Remaining TBC amount

$1,638,000 - $1,000,000

$638,000

Martin can start a second pension for up to $638,000.

Contributions

There are several thresholds that will be indexed from 1 July 2021 that impact an individual’s contribution planning.

2. Total super balance

From 1 July 2021 the total super balance threshold at which eligibility for making non-concessional contributions and receiving Government co-contributions and spouse contributions increases from $1.6 million to $1.7 million.

The increased total super balance applies to all individuals, there is no personal calculation. The total super balance continues to be measured at the previous 30 June.

3. Concessional contributions

The concessional contributions cap will be indexed to $27,500 from 1 July 2021.

This also impacts the concessional contributions five year carry forward contributions for clients who have a total super balance at the previous 30 June of less than $500,000. This threshold is not indexed.

In 2021/22, clients who have a total super balance at 30 June 2021 below $500,000 will have a concessional contribution cap of up to $102,500. This is calculated as a maximum of $25,000 for 2018/19, $25,000 for 2019/20, $25,000 for 2020/21 and $27,500 for 2021/22.


Register here to receive the Firstlinks weekly newsletter for free

4. Non-concessional contributions

The non-concessional contributions cap is calculated as four times the concessional contributions cap so from 1 July 2021 the non-concessional contributions cap will be $110,000.

The two and three year bring forward will also increase to $220,000 and $330,000 respectively from 1 July 2021.

The total super balance thresholds for determining eligibility to make non-concessional contributions also changes, as outlined in the table below:

Item

Calculated as

TSB range since 1 July 2017

TSB range from 1 July 2021

Three year bring forward

TSB – (3 x NCC cap)

< $1,400,000

< $1,480,000

Two year bring forward

TSB – (2 x NCC cap)

$1,400,000 - <$1,500,000

$1,480,000 - <$1,590,000

Annual NCC cap

TSB

$1,500,000 - < $1,600,000

$1,590,000 - < $1,700,000

Importantly the three year bring forward maximum contribution is based on the non-concessional contributions cap at the time the three year bring forward is triggered.

Case study

Shamal triggered the three year bring forward in 2020/21 by making a $120,000 contribution. He can contribute a further $180,000 prior to 30 June 2023. He does not benefit form indexation of the non-concessional contributions cap during this time.

Thresholds not indexed

In addition to the threshold for accessing the five-year concessional contributions carry forward, the $300,000 total super balance threshold for determining eligibility for the work test exemption is not indexed.

Summary

The superannuation rules changed dramatically in 2017 and introduced a variety of thresholds that determine eligibility for certain tax concessions. The indexation of the thresholds adds an additional layer of complexity from 1 July 2021. Understanding the additional complexities will assist individuals to maximise the tax concessions available in super.

 

Julie Steed is Senior Technical Services Manager a Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.

 

7 Comments
J Devitt
April 04, 2021

Thanks for the article. Would have been nice to see the mathematical working in your ‘Martin’ example. This would be helpful to understand how you got to $638,000. At the moment it is just looking like the The Hitchhiker's Guide to the Galaxy by Douglas Adams, the "Answer to the Ultimate Question of Life, the Universe, and Everything". I guess that was the point of the article.

Geoff F
April 06, 2021

Hi J Devitt,
I usually read these articles in portrait mode on my smartphone, n perhaps like u, couldn't see the full workings of the $638K calculation bcos the details didn't wrap around on the screen but were simply truncated, perhaps bcos the data was in tabular format. A few more details became visible with smartphone in landscape mode.
If this article is viewed on an iPad size screen or larger, all the information n calculations re the $638K are visible.
Rgds, G

Tom Mulligan
April 03, 2021

If you leave it to the politicians and the bureaucrats it will always be complicated as they are generally divorced from reality. Simple + good complexity + nonsense.
Tom M

Paul Arnold
April 03, 2021

Thay need to say it in layman terms
So confusing.

Nabs
April 01, 2021

How did we get into the mess that requires this level of complexity?

stefy
April 07, 2021

Scott Morrison.
He was the Treasurer who introduced the changes on 01/07/2017. Prior to that, the super rules who actually fairly straightforward. Now it takes an accountant who spends their working life trying to understand the intricacies.

Jenny
April 01, 2021

Thanks for the explanation, Julie. I knew the TBC was going up but little has been said about the increase in contribution cap to $27,500 which affects far more people. Good to know well in advance.

 

Leave a Comment:

     

RELATED ARTICLES

Claiming a tax deduction for super contributions

Why 'total superannuation balance' is important for SMSFs

Monica's Q&A on $1.6 million super rules

banner

Most viewed in recent weeks

400th Edition Special: 45 of the best investment ideas

Over eight years since February 2013, Firstlinks has become a leading financial newsletter, publishing thousands of articles from hundreds of writers. To mark this milestone, 45 experts have joined the celebration for our 400th edition bringing their best investing ideas for the next few years.

Four bubbly market pockets show heightened risk for investors

At the top of every market, there are signs that investors look back on and say the excesses were obvious. While many parts of the market are fairly valued, here are four bubbles which show irrational exuberance.

Turning point: the 2020s baby boom retirement surge

Every week, 2,500 Australians retire, or at least, reach the age of 65, and 2021-2027 will represent the peak years of the baby boom retirement surge. Longevity of life comes with dangers and opportunities.

Hume and Frydenberg reset super with two buzz words

The solutions to retirement problems are obvious. All we need are 'efficiency' and 'flexibility'. Learn what these two words mean and the future of superannuation policy is clear. Just don't tell Paul Keating.

How long will my retirement savings last?

Many self-funded retirees will outlive their savings as most men and women now aged 65 will survive at least another 20 years. Compare your spending with how much you earn to see how long your money will last.

The world in 2030: Six investing tips for the next decade

Six portfolio managers look at how life may change by the end of the decade and how shifting trends are influencing their investment decisions. It's an optimistic view of the world in 2030 as a better place.

Latest Updates

Retirement

How long will my retirement savings last?

Many self-funded retirees will outlive their savings as most men and women now aged 65 will survive at least another 20 years. Compare your spending with how much you earn to see how long your money will last.

Property

Why you can't invest in residential property on the stock exchange

Residential property attracts little interest from institutional investors and the listed market. Here are three reasons why retail investors have an advantage over well-resourced institutional investors.

Investment strategies

Three charts on the surprising rise of Australian retail investors

It may surprise even industry insiders that over 30% of all trading on Chi-X comes from retail brokers. What is the growing influence of retail investors on Australian stock exchanges and who are they using?

Investment strategies

Five reasons why EM equities could power ahead in 2021

A broader rebound beyond tech companies is likely to accelerate. Structural reforms may regain momentum after COVID and a lower risk premium is warranted for emerging markets equities compared with prior crises.

Superannuation

Consumers need an effective super performance test

Fund performance varies over time. A fund may have strong capability and perform well over time, but it may fail the performance test at some point. The YFYS reforms create unwelcome and unintended consequences.

Strategy

Unlimited potential: innovation wrap for March 2021

This month's look at innovations changing the world explores computer chips, cryptocurrencies, renewables, cybersecurity, robotics, mobility, alternative foods, finance ... there is no limit to human ingenuity.

Superannuation

My 'purpose of super' is probably not yours

One problem with defining a single and universal purpose of superannuation is that people have contributed to super for years, even decades, with different ideas and intentions.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.