Indexation uncertainty creating conundrums with contributions

Speaking at the SMSF Adviser Technical Strategy Masterclass, Ms Heffron said the contribution caps and the transfer balance cap are indexed to two different things.

“I’ve very deliberately said that it might not be, because they’re actually indexed to two different things. The contribution caps are indexed to average weekly earnings and the transfer balance cap is indexed to the consumer price index, so they could both be indexed next year, neither of them next year or one next year and one the year after. We won’t know till around February,” she said.

Ms Heffron said this uncertainty can make certain types of planning difficult, such as whether to utilise the bring-forward rules.

“It’s difficult to know whether you want to do a bring-forward this year. We know exactly what the thresholds were at 30 June 2020, but if you lock one in this year, and the cap does get indexed, then effectively you’re locking in three years to do $300,000 in non-concessional contributions, rather than three years to do $330,000,” she cautioned.

“You won’t get the rest of the increase once you’ve already locked the bring-forward in.”

Any movement in the transfer balance cap threshold could also impact strategies for clients, she added.

“You might have a client who’s just over $1.4 million at the moment and you say to them, ‘Sorry, you can’t do a three-year bring-forward. You can do a two-year one though, so maybe we’ll do that.’ But what if the transfer balance cap gets indexed next year?” she questioned.

“[In that case], the threshold they’re assessed against won’t be $1.4 million, it will be $1.48 million, and so maybe if they wait till next year, they could do a three-year bring-forward.”

SMSF professionals will need to work through the maths with some of these scenarios once there is more clarity around indexation next year, Ms Heffron said.

SMSF professionals should also be aware of what happens where the transfer balance cap increases during a bring-forward.

“Let’s say we’ve started a bring-forward now and the transfer balance cap increased in the future. If the client had a higher total super balance and had only been able to lock in a two-year bring-forward but next year the cap goes up and now it looks like they could do a three-year bring-forward, can they reset things? Unfortunately, no — once you’re locked in, you’re locked in till your time period ends,” she explained.