When looking to fund your retirement lifestyle from your super benefits, a tax-effective option can be to transfer your super benefits from accumulation phase to retirement phase by commencing a retirement income stream.
In terms of the tax-effectiveness of a retirement phase income stream (e.g. an account-based pension):
1. Investment income and capital gains from the assets supporting a retirement phase income stream are generally exempt from taxation.
2. Income (pension) payments and lump sum withdrawals paid to you from age 60, are generally tax-free.
However, there is a limit to the amount of super benefits that can be moved to retirement phase income streams to receive these tax concessions—referred to as the transfer balance cap (TBC), which was introduced from 1 July 2017. Below we provide a brief overview of the TBC and an important update.
Transfer balance cap (TBC)
The TBC limits the amount of super benefits that can be transferred to retirement phase. With the above in mind (tax concessions), the TBC limits the amount of super assets that are exempt from tax.
Importantly, the ATO recently advised of an upcoming change to the TBC, which will take effect from 1 July 2021. The change relates to the amount of super benefits that can be transferred to retirement phase.
However first, here is some important context. There is a general TBC and a personal TBC—below are several brief points regarding both of these (for a more comprehensive overview, please click here):
- The general TBC is currently set at $1.6 million (indexed) per person (not per retirement phase income stream owned by a person) for the 2020-21 financial year. In addition, in terms of indexation, the general TBC is indexed in $100,000 increments in line with the Consumer Price Index (CPI).
- Upon commencing a retirement phase income stream, you also start to have a personal TBC and a transfer balance in your own transfer balance account. These will remain with you until you pass away.
- Your personal TBC is initially equal to the general TBC for the financial year that you start to have a transfer balance account. However, your personal TBC can diverge from the general TBC if the general TBC is indexed.
In December 2020, the ATO advised that indexation of the general TBC would occur if the CPI figure for the December 2020 quarter was ≥116.9. The recently released data from the ABS has shown that the CPI figure for the December 2020 quarter was 117.2. As such, from 1 July 2021, the general TBC will be indexed to $1.7 million.
As outlined by the ATO, the indexation of the general TBC to $1.7 million has the following effect:
- If you commence a retirement phase income stream for the first time on or after 1 July 2021, you will have a personal TBC of $1.7 million.
- If you had a transfer balance account before 1 July 2021, you will have a personal TBC of either:
- $1.6 million if, at any time between 1 July 2017 and 30 June 2021, the balance of the transfer balance account was $1.6 million or more; or
- between $1.6 and $1.7 million in all other cases. If you used only a portion of your personal TBC before 1 July 2021, then the unused portion is indexed, which works accordingly:
- Let’s say, for example, your highest ever transfer balance was $640,000, and the general TBC (also your personal TBC) was $1.6 million. This means you had an unused personal TBC of $960,000 (an unused percentage of 60%).
- When the general TBC is indexed to $1.7 million, you’re entitled to 60% of the indexation amount of $100,000, which is $60,000. This means that you now have a personal TBC of $1.66 million, and your unused personal TBC is $1.02 million.
Other important considerations
An accumulation phase transition to retirement income stream (TRIS) moves to a retirement phase TRIS when you meet a condition of release with a ‘nil cashing restriction‘. When this move occurs, it’s counted towards your transfer balance.
In addition, it’s also important to note that the indexation of the general TBC changes other caps and limits. For example, as noted by the ATO, when the general TBC is indexed on 1 July 2021 the following will occur:
Non-concessional contributions cap and bring-forward rule. If you have a total super balance of $1.7 million or more on 30 June 2021, you will have a non-concessional cap of nil.
Government co-contribution. If you have a total super balance of less than $1.7 million on 30 June 2021, you will be eligible for the Government co-contribution, if other criteria are met.
Spouse contribution tax offset. You may be able to claim the spouse contributions tax offset for non-concessional contributions you make on behalf of your spouse, provided your spouse’s total super balance is not more than $1.7 million on 30 June 2021, and other criteria are met.
If you have any questions regarding this article, please contact us.