With a lot of misunderstanding still surrounding the transfer balance cap, one technical expert fears that if indexation of the general TBC does occur, this will result in “significant difficulties” for many SMSFs.
Indexation of TBC tipped to trigger surge in excess amounts
In an update last week, the ATO reminded SMSFs that if the All Groups consumer price index (CPI) figure for the December 2020 quarter is 116.9 or higher, then indexation of the general transfer balance cap will occur on 1 July 2021.
This means that an individual who starts their first retirement phase income stream on or after indexation will have a transfer balance cap of $1.7 million.
With many SMSF trustees and practitioners still not understanding the intricacies of how the transfer balance cap operates, Australian Executor Trustees senior technical services manager Julie Steed said if the December CPI figure does result in the indexation of the cap, this will “create significant additional difficulties for [SMSFs]”.
“I’m already finding that a lot of practitioners still don’t understand how the transfer balance cap works sufficiently well. If we get indexation, and have a situation where every SMSF in their client base has a different transfer balance cap, it’s going to result in a lot more excesses just through misunderstanding,” Ms Steed cautioned.
The ATO previously explained that once indexation of the general transfer balance cap occurs, there will be no single transfer balance cap which applies to all individuals.
“[For example], an individual who already had a transfer balance account and who at any time met or exceeded the $1.6 million transfer balance cap will not be entitled to indexation and their personal transfer balance cap will remain at $1.6 million,” the ATO said.
“For every other individual, their entitlement to indexation will be based on identifying the highest-ever balance in their transfer balance account and using this information to calculate the proportional increase in their transfer balance cap and applying that new personal transfer balance cap to their affairs going forward. These individuals will have a personal transfer balance cap somewhere between $1.6 million and $1.7 million.”
Ms Steed said another area where there is a lot of misunderstanding is with defined benefit pensions.
“We’ve had updated legislation for how we calculate the transfer balance debit amount for life expectancy pensions and term allocated pensions,” she noted.
Many of these clients commuted these pensions based on the previous explanatory memorandum and the whole industry’s understanding of the law.
“Then nearly three years later, we now have a completely different methodology which is backdated, and results in clients having an excess, which I think is really unreasonable,” Ms Steed said.