14 December 2020
James Kirby – Wealth Editor
Superannuation tax concessions are about to expand as an unlikely economic rebound is set to trigger an increase in the amounts that can be held in tax-protected super funds.
Investors should soon be able to have $100,000 more in tax free retirement funds – and contribute a combined $12,500 more into their super annually during working years – as long awaited “indexation” kicks into action over the coming months.
The Australian Taxation Office has issued a public update alerting the finance industry to changing consumer prices which are expected to trigger an expansion of the all-important transfer balance cap – the amount that can be transferred to fund a tax free pension.
In the note the ATO has pointed out that if the Consumer Price Index for the December quarter is 116.9 or higher, “the indexation of the general transfer balance cap will occur on 1 July 2021”. With CPI rebounding in recent months, economists expect CPI will rise beyond this number. At Deloitte Australia, the forecast for the December quarter CPI is 117.
Existing superannuation concessions have been criticised in the wider debate over retirement incomes. The recent Retirement Income Review suggested superannuation concessions were costing the tax system close to $42bn annually. Nonetheless, the expanded limits will be widely welcomed by investors.
Just now the total amount that can be transferred on retirement to super underpinning a tax-free retirement is $1.6 million per individual. That number is set to rise to $1.7m for those who “start their first retirement phase income stream on or after indexation”.
Separately, industry professionals have noted that contribution caps – the amount that can be contributed to super on a pre and post-tax basis – will also receive an indexation-based increase thanks to rising average weekly wages.
At present, the amount that an individual can contribute to super is limited to $25,000 on a pre-tax (concessional) basis and $100,000 on a post tax (non concessional) basis. These amounts are set to rise to $27,500 and $110,000 at the same time next July.
An absurd twist
The changes will also unleash confusion by creating new tiers within superannuation where different people at different ages have different caps on how much they can have funding tax free super.
In a twist that only the absurdly complex super system could come up with, industry professionals have been baffled as to why super caps are indexed in relation to different economic numbers: The CPI and Average Weekly Ordinary Time Earnings (AWOTE). Indexing allows the government to change ‘caps’ as inflation moves higher.
Peter Burgess, deputy CEO and director of policy and education at the Self Managed Super Funds Association, believes that on the basis of the most recent figures it is looking like both caps will go up. “When the government created the system many in the industry said it is going to be very confusing when indexation kicks in. Now, it’s fast approaching,” he says.
In July 2017 the Transfer Balance Cap was introduced as a way to tax the wealthiest users of the super system. Once a person has more than $1.6m in super, the earnings on the amount in excess of $1.6m are eligible for tax: Amounts in excess of $1.6m in the super system are generally taxed at the 15 per cent “accumulation” rate.
The higher Transfer Balance Cap of $1.7m will largely apply to new retirees transferring funds to start a pension.
“We thought the changes might happen in 2020 but COVID-19 put a brake on it. Now investors are surprised at the rebound in the economy and I expect many will be surprised to see the caps lifting as well, “ says Lyn Formica, head of SMSF technical at Heffron.