From 1 July 2021, the general transfer balance cap (TBC) and concessional and non-concessional contributions caps have increased, allowing eligible clients to move more retirement savings to a more concessionally taxed environment.

In addition, legislation was passed in June 2021 to allow those aged less than 67 years in the financial year to use the bring-forward non-concessional cap from 1 July 2020.

This article covers:

• The partial indexation of TBC.
• The increase to the defined benefit income cap.
• The increase in the concessional contributions (CC) cap and its impact on carried-forward unused CC caps.
• The increased non-concessional contributions (NCC) and new total superannuation balance thresholds.

Overview of changes

The TBC, which is indexed to the consumer price index in $100,000 increments, increased from $1.6 million to $1.7 million from 1 July 2021. This means that the new $1.7 million TBC allows more superannuation interests to be rolled over to retirement phase (RP) income streams.

As a result of the increase in the TBC, the defined benefit income cap also increases to $106,250 per annum in FY2021-22. This means recipients of capped defined benefit income that exceed $100,000 per annum will benefit more from tax concessions.

The indexation of the general TBC also allows more of your clients to make NCCs. This is because the total superannuation balance (TSB) threshold at which the NCC cap is nil for the financial year, reflects the general TBC, now $1.7 million. The TSB for this financial year is taken at 30 June 2021.

The CC cap is indexed to average weekly ordinary time earnings (AWOTE) in $2,500 increments. It increased from $25,000 per annum to $27,500 per annum on 1 July 2021.

The NCC cap is four times the CC cap and therefore increased from $100,000 per annum to $110,000 per annum (calculated $27,500 x 4). This means eligible clients can make more after-tax contributions to superannuation from this financial year.

While this is great news for clients, the increased general TBC and increases in both the CC cap and the NCC cap creates more complexity for you, as a financial planner. You must become familiar with the new bring-forward NCC caps and their relevant bring-forward TSB thresholds to maximise your clients’ NCCs and to avoid recommending excess NCCs. You will need to take extra care in establishing the correct personal TBCs for your clients where these are between $1.6 million and $1.7 million, because of partial indexation.

Partial indexation of the TBC

Since 1 July 2017, the $1.6 million TBC has limited the total amount of superannuation a member can use to commence RP income streams. While the general TBC increased to $1.7 million, the increase does not apply to everyone and will apply as follows:

• $1.6 million TBC continues to apply to members who used 100 per cent of their TBC any time before 1 July 2021
• $1.7 million TBC applies to those who have not yet commenced an RP income stream (have no transfer balance account [TBA] before 1 July 2021)
• A value between $1.6 million to $1.7 million is to be calculated for those who have only ever used part of their TBC before 1 July 2021

While it is easy to establish personal TBCs for the first two above-mentioned clients, it is not the case for clients who commenced RP income streams prior to 1 July 2021 but who never used 100 per cent of their TBC.

For these clients, indexation applies only to the portion of the TBC that was never used.

To calculate partial indexation, take the highest ever balance in your client’s TBA (not the balance just before indexation) expressed as a percentage and round it down to the nearest whole number. This is the used percentage. Deduct the used percentage from 100 per cent to get the unused percentage. Multiply the unused percentage by $100,000. Add the result to $1.6 million. Refer to Example 1 as follows^[1].

Example 1

Carmen had the following transactions reported in her TBA:

• 1 July 2017: Had account-based pension #1 with a balance of $400,000
• 1 July 2018: Commenced account-based pension #2 with $500,000
• 1 July 2019: Commenced account-based pension #3 worth $300,000
• 30 June 2021: Carmen commuted $200,000 from account-based pension #1, which caused her TBA balance to reduce to $1 million

Carmen’s Transfer Balance Account
Date	Transaction	Debit	Credit	Transfer cap balance	Unused transfer balance cap
					$ 1,600,000
1/07/2017	Account-based pension #1 balance at 30 June 2017		$ 400,000	$ 400,000	$ 1,200,000
1/07/2018	Account-based pension #2 commenced		$ 500,000	$ 900,000	$ 700,000
1/07/2019	Account-based pension #3 commenced		$ 300,000	$ 1,200,000	$ 400,000
30/06/2021	Commutation from account-based pension #1	$ 200,000		$ 1,000,000	$ 600,000

Carmen’s highest TBA balance was $1.2 million and her used percentage is 75 per cent (this amount is rounded down to the nearest percentage).

Accordingly, her unused percentage is 25 per cent. Carmen’s personal TBC increased by $25,000 (25% X $100,000).

Carmen’s personal TBC at 1 July 2021 was $1,625,000 ($1,600,000 + $25,000).

Tech Tip: The Australian Taxation Office (ATO) calculates a client’s new TBC. Your client’s personal TBC can be found in the member’s myGov account linked to the ATO.

Where possible, financial planners may encourage clients to confirm their TBA balances, TSB and other superannuation details by logging into their myGov ATO account.

Financial planners should verify that any recent TBA report (TBAR) events have been reported to the ATO and are reflected in the client’s myGov ATO account before commencing or commuting RP income streams.

Increased defined benefit income cap

Income from capped defined benefit income streams (generally non-commutable income streams), referred to as defined benefit income, can benefit from tax concessions up to the defined benefit income cap for recipients who:

• are age 60 or older; or
• are beneficiaries of death benefit capped defined benefit income streams where the member passed away at age 60 or older.

The defined benefit income cap is calculated as: The general transfer balance cap/16.

The increased general TBC increased the defined benefit income cap from $100,000 per annum in FY2020-21 to $106,250 per annum in FY2021-22, calculated as $1.7 million/16. Those who receive defined benefit income in excess of $100,000 per annum have up to an additional $6,250 of that income benefit from tax concessions from 1 July 2021.

Defined benefit income is counted towards the defined benefit cap in the order as follows:

1. Tax-free and taxable (taxed) components within the cap are tax-free, then 50 per cent of the amount exceeding the cap is taxed at the recipient’s marginal tax rate (MTR).
2. Taxable (untaxed) component is taxed at the recipient’s MTR and a 10 per cent tax offset arises for the amount within the cap to reduce tax payable. Amounts exceeding the cap do not attract the 10 per cent tax offset.

Example 2

Albert, aged 65, received $150,000 in FY2020-21 from a capped defined benefit pension with the following tax components:

$40,000	Tax-free and taxable (taxed) component (26.67%)
$110,000	Taxable (untaxed) component (73.33%)
$150,000	Total pension per financial year

The tax-free and taxable (taxed) components ($40,000) counted first towards the defined benefit income cap and were received tax-free.

The taxable (untaxed) component ($110,000) was taxed at Albert’s MTR.

The taxable (untaxed) component within the defined benefit income cap was $60,000 ($100,000 – $40,000), therefore the 10 per cent tax offset was $6,000 in FY2020-21.

The remaining taxable (untaxed) component exceeding $100,000 ($50,000) did not attract the 10 per cent tax offset.

In FY2021-22, Albert’s defined benefit pension increased to $155,250 per annum. The defined benefit income cap increased to $106,250. The new capped defined benefit pension tax components were:

$41,400	Tax-free and taxable (taxed) component (26.67%)
$113,850	Taxable (untaxed) component (73.33%)
$155,250	Total pension per financial year

The tax-free and taxable (taxed) components equal $41,400 and are within the income cap, so these are received tax-free.

The taxable (untaxed) component is $113,850 and taxed at Albert’s MTR. The taxable (untaxed) component within the defined benefit income cap is $64,850 ($106,250 – $41,400), therefore the 10 per cent tax offset arising is $6,485.

The remaining taxable (untaxed) component exceeding $106,250 ($49,000) does not attract the 10 per cent tax offset.

Increased CC cap and carried-forward unused CC caps

The CC cap increased from $25,000 to $27,500 per annum on 1 July 2021. The CC cap is indexed to AWOTE in $2,500 increments.

The CC cap of clients whose TSB was less than $500,000 at 30 June 2021 is calculated as the annual CC cap plus any unused CC cap since the 2018-19 financial year.

This means the maximum CC cap available in FY2021-22 for these clients is $102,500 (calculated as $25,000 in 2018-19 + $25,000 in 2019-20 + $25,000 in 2020-21 + $27,500 in 2021-22) if they had no CC since 1 July 2018.

In FY2022-23, the maximum CC cap available for these clients is likely to be $130,000 (calculated as $25,000 in 2018-19 + $25,000 in 2019-20 + $25,000 in 2020-21 + $27,500 in 2021-22 + $27,500 in 2022-23). The ATO is yet to confirm indexation from 1 July 2022, although the cap is likely to remain at $27,500.

Clients who qualify for carry forward contributions and have increased income or plan to realise large capital gains on the sale of their assets, should consider whether the income or sale should be realised this financial year or possibly deferred until next financial year (assuming less than $500,000 TSB 30 June 2022). Eligibility to contribute, such as the work test and age limits, must also be considered.

Example 3

Martha, aged 63, retired five years ago. Her TSB at 30 June 2021 was $100,000.

She expects to make a capital gain after the 50 per cent CGT discount of $175,000 if she sells a property.

Martha has not made any CCs in the last five years, so her personal CC cap in FY2021-22 is $102,500.

If she sells her property in August 2021, she can make a $102,500 personal deductible contribution to her super to reduce her taxable capital gain to $72,500 ($175,000 less $102,500).

If Martha defers the sale to FY2022-23, assuming no CC contributions in FY2021-22 (and a $27,500 cap next financial year) she can make a personal deductible contribution of $130,000 to reduce her taxable capital gain to $45,000 ($175,000 less $130,000).

By deferring the property sale to FY2022-2023 and using her increased CC cap to make a larger personal deductible contribution, she can reduce her taxable capital gain by an additional $27,500. Her personal deductible contributions will be taxed at 15 per cent in super, which is less than her marginal tax rate.

Martha should consider other factors, such as whether she can easily sell the property at the same price or higher if she deferred the sale.

Increased NCC caps and the new TSB thresholds

A member’s NCC cap is nil for the financial year where their TSB (which includes the balances of their pensions, accumulation accounts and any rollovers between these accounts²) at the end of 30 June of the last financial year equals or exceeds the general TBC.

The TSB threshold increased from $1.6 million to $1.7 million, meaning more clients can make NCCs in FY2021-22. Eligible clients on low incomes who have a TSB greater than $1.6 million but less than $1.7 million can top up their super and may receive the Government co-contribution and/or spouse contributions if eligible, for example, retirees, those on maternity leave or on a career break.

Clients aged 67 to age 74 must meet the work test in the financial year of contribution (except for downsizer and mandated contributions), unless they qualify for the work test exemption.

Members who are under 67 years old anytime in the 2021-22 financial year may trigger the bring-forward NCC cap and relevant bring-forward NCC period if, at 30 June 2021, their TSB was:

Total superannuation balance (TSB)*	Contribution cap and bring-forward period
Less than $1,480,000	$330,000 cap over three years
Greater than or equal to $1,480,000 but less than $1,590,000	$220,000 cap over two years
Greater than or equal to $1,590,000 but less than $1,700,000	$110,000 cap with no bring-forward period
Greater than or equal to $1,700,000	Nil

* The TSB thresholds are based on the general TBC of $1.7 million at 30 June 2021 (not the person’s indexed TBC).A person’s TSB threshold will increase by the amount of any personal injury contributions they make.

Tech Tips: Once the bring-forward NCC cap is triggered, it crystallises the NCC cap that covers the bring-forward period (e.g. $220,000 over the two-year bring-forward period and $330,000 over the three-year bring-forward period). Once crystallised, that bring-forward cap does not increase, even if the annual NCC cap is indexed during that bring-forward period.

If your client’s TSB is $1.7 million or more at 30 June 2021, NCCs cannot be made, even if the client has remaining unused NCC bring-forward caps.

It may be preferable to maximise contributions in the current financial year where your client expects not to be eligible to contribute in the next financial year because they may not meet the work test or they expect their TSB will be $1.7 million or more next 30 June.

Clients who are eligible to trigger the bring-forward in FY2022-23 can consider contributing up to the annual cap this financial year and trigger the bring-forward next financial year, subject to their total super balance.

Example 4

Elsa was aged 65 on 1 July 2021. Her TSB at 30 June 2021 was $1,450,000, but her current balance is $1,550,000.

She has $400,000 to contribute to super. If Elsa makes $110,000 NCC in FY2021-22, her TSB may be about $1,660,000 next 30 June (depending on earnings), which means she can only contribute an additional $110,000 NCC in FY2022-23 ($220,000 altogether).

She can contribute $330,000 NCCs in FY2021-22, triggering the bring-forward NCC cap, as her TSB was $1,450,000 on 30 June 2021. Then, she cannot make any NCCs until 1 July 2024 without exceeding the cap, which provides a better outcome for Elsa.

Note: In the May Budget 2021, the Government proposed to allow individuals aged 67 to 74 to:

• trigger the bring-forward NCC cap; and
• remove the work test requirement for NCCs (including spouse contributions) and salary sacrifice contributions.

The expected start date of the proposals is 1 July 2022. At the time of writing, no legislation has been introduced.

Conclusion

Increases in the general TBC, TSB thresholds and contribution caps are good news for clients who want to accumulate more retirement savings that enjoy generous tax concessions. Carried-forward unused CC caps can save tax for eligible clients who wish to sell their investments and contribute to super.

However, the indexation of the TBC creates complexity for financial planners with clients who have personal TBCs between $1.6 million and $1.7 million.

Financial planners must confirm their client’s TSB before recommending NCCs to avoid miscalculation, which could lead to excess contributions and tax impacts. The timing of bring-forward NCCs for clients aged under 67 can make a huge difference to their superannuation savings.

At the time of writing, legislation in the Budget announcement allowing clients aged 67 to 74 to make NCCs and salary sacrifice without meeting the work test and to trigger the bring-forward NCC cap has not been introduced in Parliament, providing uncertainty for financial planners and clients wanting to take advantage of this proposed change.

Financial planners must be alert to opportunities, use increasing caps and respond to any changes in legislation for their clients’ benefit.

Janet Manzanero-Caruana is Senior Technical Manager at IOOF.

1. Those receiving child pensions do not have increased child death benefit TBC increments. However, if they received their own RP income stream, their personal TBC increased if they had not used 100 per cent of the $1.6 million TBC at any time before 1 July 2021.
2. The TSB also includes certain SMSF limited recourse borrowing amounts and reduced by any personal injury contributions.

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QUESTIONS

To answer the following questions, go to the Learn tab at moneyandlife.com.au/professionals

1. Jemma started an account-based pension for $800,000 on 1 July 2020. She has no other transfer balance account entries. What is Jemma’s personal transfer balance cap from 1 July 2021?
   1. $800,000.
   2. $1,600,000.
   3. $1,650,000.
   4. $1,700,000.

2. Louisa, age 55, is expected to have a TSB of $1,580,000 at 30 June 2022. What is the maximum NCC she can contribute in FY2022-23? Assume no indexation to thresholds from 1 July 2022.
   1. $110,000.
   2. $220,000.
   3. $280,000.
   4. $330,000.

3. Martin, age 64, had an estimated TSB of $485,000 at 30 June 2021. He made the following concessional contributions in prior financial years:

2018-19 – $15,000

2019-20 – $15,000

2020-21 – $25,000

What is his concessional contributions cap in 2021-22?

1. 1. 500. $47,500.
      501. $57,500.
      502. $75,000.
      503. $102,500.

4. Martin, aged 67, has a Government defined benefit pension. For 2021-22 his defined benefit income from that pension is $140,000 per annum consisting of the following tax components:

$120,000 taxable (taxed) component; and

$20,000 taxable untaxed component.

The tax treatment of the pension will be:

1. 1. $13,750 of taxable (taxed) component and $20,000 (untaxed) component taxed at marginal tax rate.
   2. $6,875 of taxable (taxed) components and $20,000 taxable (untaxed) component taxed at marginal tax rate.
   3. $6,875 of taxable (taxed) components and $20,000 taxable (untaxed) component taxed at marginal tax rate with $2,000 tax offset.
   4. $120,000 taxable (taxed) components are tax-free and $20,000 taxable (untaxed) component with $2,000 tax offset.

5. Of the following statements, which one is incorrect?
   1. The client’s NCC cap is nil for the 2021-22 financial year if the client’s total superannuation balance is $1.7 million or more at 30 June 2021.
   2. The CC cap is indexed to AWOTE in $2,500 increments. The NCC cap is four times the CC cap.
   3. A person aged 40, who is not in a bring-forward period, may make non-concessional contributions up to $220,000 in 2021-22 if their TSB at 30 June 2022 is equal to or more than $1,480,000 but less than $1,590,000.
   4. The TSB threshold at which a person’s NCC cap is nil for the financial year is equal to the general TBC.