How to work out new rules for superannuation caps

There is now clarity on super cap rules for the end of the financial year, but strap in for some serious calculations. Here are some expert tips to make it easier.

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It always makes sense to keep up with super “caps” and we now have clarity around superannuation rules leading up to the end of the financial year and beyond.

When the new financial year arrives on July 1, only one key superannuation cap will increase and everything else remains the same.

Even though inflation was 3.5 per cent in 2021 and 7.8 per cent in 2022, this has not been enough to trigger an indexation increase on most super caps, including contribution caps: The amount that you can put into super pre-tax or after tax.

What’s more, the one and only cap increase may not be as lucrative as it initially seems, particularly to retirees.

In July 2021 the concessional (pre-tax) contribution cap increased from $25,000 per year to $27,500 while the non-concessional cap increased from $100,000 to $110,000.

If we apply the inflation rate of 7.8 per cent from 2022 to the concessional and non-concessional caps, the caps should be $29,645 and $118,580 respectively from July 1. Alas, this will not be the case because they are lagging to a lagging indicator, wage inflation. As a result they will unchanged for the 2023-2024 financial year.

Other super caps also remain the same for the next year. The extra 15 per cent tax on super contributions (in addition to the base 15 per cent contributions tax) known as Division 293 tax, will remain the same with a $250,000 income threshold for the 2023/24 financial year.

Similarly, the government is not going to increase the super balance threshold of $500,000: if your total super balance is below this amount it allows you to catch up and make up to five years worth of unused super contributions.

The same goes for the downsizer contribution which is an extra $300,000 contribution cap for those 55 and older who sell their home that they have lived in for 10 years and is not changing.

The one super cap that is increasing is the transfer balance cap. This is the one that dictates how much super you can transfer to a tax-free pension. The cap is $1.7m and will increase to $1.9m from July 1. However, if you already have a tax-free super pension, you will not benefit in full from the $200,000 cap increase and need to be careful about adding more to your pension account, particularly if you have a self-managed super fund.

You would think that if a cap increases, everyone goes from the old cap to the new cap. However, because of a peculiar rule where only your unused transfer balance cap gets indexed, many superannuates will get a rude shock when trying to push more money into the tax-free pension phase from July 1.

This is how it works in practice:

● If you have all of your super in the accumulation phase, then your transfer balance cap is currently $1.7m. This is how much you can move into the tax-free pension phase when you retire from age 60 onwards, and from July 1 this will increase to $1.9m. In other words, you can move up to $1.9m from your super accumulation account to a tax-free super account based pension from July 1.

● However, say that you retired and commenced an account-based pension back in August 2022 with a starting balance of $1m. Your unused cap is $700,000 and when July 1 comes around you do not get the full $200,000 cap increase, you get an increase based on your unused cap – $700,000.

● Now strap in for the calculation. $700,000 is 41 per cent of the current $1.7m transfer balance cap, which means that your cap will increase by 41 per cent of the $200,000 cap increase or $82,000. Therefore from July 1 your new balance transfer cap is $1.782m and not $1.9m you may have thought.

Traps to avoid

The trap is that many SMSF trustees may assume they can add another $200,000 into their tax free pension account, but in doing so will breach the transfer balance cap and pay 15 per cent tax on the earnings and gains of the excess and 30 per cent for repeat offenders.

Luckily, you do not have to calculate your new transfer balance cap yourself, you can go log on to My.Gov.au and find out. That said, it would be better if this rule did not apply and the commonsense approach of moving everyone to $1.9m was used. A lot of hard work and astute investing generally goes into accumulating a seven-figure super balance, and many did so on the expectation it will be available as a tax-free income stream to support their retirement spending and stay off the government purse.

There has been speculation that the government would not increase the transfer balance cap to $1.9m and rather freeze the indexation at $1.7m. So from that perspective it is pleasing to see no change of policy was announced in the Budget.

But if you have an existing pension and want to use the increased transfer balance cap, make sure you work through the process to get your personalised new cap, as it may not be the full $1.9m.

Keep in mind too that we are on track for a new super tax coming into play from July 1 2025 when there will be an extra 15 per cent tax on amounts above $3m.

One more thing: In some cases super changes can be implicit rather than explicit: There was no mention of an extension to the current halving of minimum superannuation drawdowns. Many retirees who take the 50 per cent reduced minimum pension will have to double their monthly pension payments from super from July.

With the budget being criticised by some for being too inflationary, an extension of the reduced pension minimum requirement would have helped out retirees who will be forced to withdraw more than they need from their super pension from July onwards.

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au