08 Apr 2021 This week in tax
In this week’s TaxVine, Kym Bailey, ATI, Co-Chair of The Tax Institute’s National Superannuation Technical Committee discusses the impact of indexation of various superannuation caps and thresholds and the associated increase in complexity.
There’s a fraction too much indexation
Australia’s superannuation system is notorious for its inherent and unnecessary complexity. The quagmire of multiple statutes, regulations and legislative instruments, together with the myriad of dates, rates and other specific reference points, confounds even the most seasoned superannuation practitioners and stupefies millions of Australian contributors and superannuants. It seemed almost farcical when then Federal Treasurer, Peter Costello, AC, proudly stripped away the complexity of superannuation in the Federal Budget 2006–07. I was certainly not alone in thinking that the value of superannuation advice had just been vanquished. I can recall clients at the time, although very happy with all the changes (particularly tax-free withdrawals from superannuation after age 60), predicting ‘it can’t/won’t last forever’.
Further significant ‘reforms’ were made with effect from 1 July 2017, including the centrepiece of the legislative package, the introduction of the $1.6 million transfer balance cap (TBC).
It has been more than 10 years since Peter Costello’s attempt to simplify the superannuation system. Lamentably, and with the benefit of hindsight, it is evident that the meritorious goal of simplification has remained elusive. The system is more complicated than ever.
The indexation of superannuation caps and thresholds, while important to ensure superannuation maintains pace with economic growth, is a definite pain point. This is particularly so when the indexation process involves various reference points and complicated formulas to effect increases in the caps and thresholds.
The indexation of the general TBC from $1.6 million to $1.7 million on 1 July 2021 will, on face value, uplift the amount of capital that can be utilised for a retirement phase superannuation pension where the earnings on that capital are tax-free. However, it is the personal TBC that is mired with complexity. An individual’s ability to access the higher indexed cap will vary from nil or almost nothing to potentially the full $100,000.
The ‘devil in the detail’ lays in the indexation formula that applies to the TBC. The formula calculates the unused cap percentage to determine what portion of the uplift amount of $100,000 is available to the individual. The formula process results in personal TBCs that will vary considerably across superannuants and is the cause of unnecessary complexity in this seemingly innocent CPI uplift.
Issues with providing and accessing TBA data
The ATO manages the transfer balance account (TBA) on behalf of individuals and is busily preparing its systems so they are ready in time for the increased TBC on 1 July 2021 in order to provide accurate information for individuals.
However, the ATO records are only as good as the data from which they are sourced. The ATO does not mine this data; it requires superannuation fund trustees to report details of events that affect a member’s TBA through the transfer balance account report (TBAR). One of the obstacles affecting the integrity of the data is that superannuation fund trustees have three different reporting dates depending on the size of the fund, none of which align with when the event occurs. (A TBA reporting event includes the commencement and commutation of an income stream but excludes pension payments and investment earnings.)
The TBAR reporting dates are as follows:
- APRA funds have 10 days from the end of the month in which the event affecting the TBA occurs to report to the ATO.
- An SMSF with any members who have a total superannuation balance (TSB) of $1 million or more on 30 June of the financial year before the member commences their income stream (across all their superannuation accounts) is required to report 28 days after the end of the quarter in which the event occurred.
- Smaller balance SMSFs (those where all of the members have a TSB of less than $1 million) report in conjunction with the annual return due date for the financial year in which the event occurs.
The ATO is aware of the issues that face practitioners with the schism between the provision of superannuation product advice (to commence or commute a pension) and tax agents who manage, and have access to, the client’s personal tax records. However, the ATO’s role in this space is to administer the law and they are focused on improving the integrity of the data. Modifying who can provide financial advice, or who can access taxpayers’ personal tax records online, is a policy issue and a matter for the Government.
Practitioners who do not have access to ATO Online Services, such as lawyers, financial advisers and SMSF administrators, must request their clients to access the information via their personal MyGov accounts.
Impact of indexation on total superannuation balance
The TBC limits the amount of retirement phase capital. Movement in the CPI results in indexation of the general TBC. This, in turn, affects the ability of an individual to make non-concessional contributions to superannuation, based on their TSB. The levels of the general TBC and the TSB are in lockstep; however, the TSB is not functionally connected to the TBA.
To add to the complexity caused by the interaction of the TBC and the TSB, another indexation trigger, average weekly ordinary time earnings (AWOTE), has moved sufficiently to result in the indexation of the contributions caps from 1 July 2021. The concessional contributions cap will increase from $25,000 to $27,500, and the non-concessional contributions cap will consequently be uplifted from $100,000 to $110,000. When the indexation of the contributions caps is applied across all the impact points, along with the interaction of the non-concessional contributions cap with the TSB, the complexity of superannuation is further exacerbated.
The issue of proportional indexation of the personal TBC has been an important advocacy matter for The Tax Institute’s National Superannuation Technical Committee, with a formal submission provided to Treasury in August 2020. The submission requested the removal of proportional indexation along with the introduction of a permanent relief mechanism to allow inadvertent and minor breaches to be disregarded. The National Superannuation Technical Committee continues to advocate ahead of the 1 July 2021 commencement date, with a concerted effort to prevent the first tranche of partial indexation eventuating.
We will provide a member-only Ready Reckoner on the indexation of the superannuation caps and thresholds soon.
As always, we welcome your views and thoughts, which you can provide here.
Kym Bailey, ATI