TBC indexation to spur wide range of complex scenarios
A technical expert has stressed the importance of reporting TBAR events on time from July, with indexation set to make the calculation for personal transfer balance caps significantly more complicated.
In a recent online article, SMSF Alliance principal David Busoli explained that provided the increase in the general transfer balance cap from $1.7 to $1.9 million does take place on 1 July, SMSF professionals will need to pay close attention to the impact this has on a member’s personal transfer balance cap.
The personal transfer balance cap relies on the highest transfer balance ever reported, with commutations having no effect, he noted.
Mr Busoli provided a number of detailed scenarios to highlight how complex the calculation will become once a second indexation event occurs on 1 July this year.
While the impact of the indexation increase will be quite easy to determine if the member has already maxed out their cap or will commence their first pension from 1 July 2023, for other types of scenarios it will be much more complicated, Mr Busoli cautioned.
He gave an example of an individual commencing a pension before indexation first increased to $1.7 million on 1 July 2017, with no other pension being commenced since then.
Their personal transfer balance cap will increase by the percentage based on the $1.6 million cap, he noted.
“So, if a pension had commenced prior to 1 July 2021 with $960,000 (60% of $1.6 million) then $40k (40% of the $100,000 indexation amount) would apply and their PTC would be $1.64 million until 1 July 2023.”
“As no new pensions have commenced, the same percentage that applied to the first indexation, 40%, would apply to the next so 40% of $200k ($80k) would be added thus creating a personal TBC of $1.72 million. As $960k has been used an additional pension may be commenced with $760k.”
Another scenario, he explained, could be where the pension is commenced for the first time after 1 July 2021 when the general transfer balance cap is $1.7 million.
“If the commencement value was $1.02 million (60% of $1.7m), then from 1 July 2023, their personal TBC would be increased by $80k (40% of $200k) to $1.78 million. As $1.02 million has been used an additional pension may be commenced with $760k,” he said.
Another alternative scenario, he said, is where the pension is commenced before the first indexation event that happened 1 July 2021 and another is commenced after 1 July 2021 but before 1 July this year.
“Their personal TBC will firstly increase by the percentage based on the $1.6 million cap. So, based on the first scenario, their personal TBC would be $1.64 million after the first indexation but now an additional pension commences with $352k before 1 July 2023,” he explained.
“The highest TBA is now $960k + $352k = $1.312 million. The percentage of the personal TBC that has been used is recalculated based on the personal TBC at the time ($1.64 million). As 80% of $1.64 million has been used the indexation that will apply is 20% of $200k ($40k) so their new personal TBC will be $1.68 million. As $1.312 million has been used, an additional pension may be commenced for $368k.”
Mr Busoli noted that it may take a while before the exact personal transfer balance cap has been calculated by the ATO as they will need to have received all relevant TBARs that apply to the period up to 30 June 2023.
“This should be by 28 October 2023, but there will always be some stragglers,” he said.