Nick Bruining: Here’s how to make the most of the $2m transfer balance cap for superannuation

It’s been all but confirmed by the tax office — Australians are set to see a $100,000 increase in the amount of money they can invest in an environment that’s completely tax-free, no strings attached.

The transfer balance cap is the amount of money that can be transferred from superannuation in the taxed accumulation phase to the tax-free retirement or pension phase.

The TBC also establishes an on-off switch for some investors to make any additional contributions to super.

For example, someone who has a total superannuation balance that has reached or exceeds their TBC is unable to make additional non-concessional contributions to super or receive a government co-contribution.

The TSB is the total of all money in both accumulation and retirement phase.

When the current system started in 2017, the TBC was set at $1.6 million. Thanks to historically low inflation rates for the rest of the decade, the first increase didn’t come into effect until 2021.

Colonial First State manager of technical services Craig Day said key data released late in January would trigger the increase in the TBC.

“The December-quarter consumer price index value confirmed that the general transfer balance cap, currently sitting at $1.9m, will increase to $2m on July 1 this year,” Mr Day said.

Earnings within a taxed accumulation superannuation fund are taxed at rates of up to 15 per cent. When converted to retirement phase, the tax rate falls to zero and there is no capital gains tax payable.

Assuming the investor is over the age of 60, no tax is generally payable on any withdrawals or regular payments from the scheme.

This is why superannuation is so attractive to retirees, and also why it is a target for a controversial new tax favoured by the Albanese Government.

The proposal would see a 15 per cent tax on the annual growth of super account balances above $3m.

For existing retirement phase investors, however, the July 1 increase in the TBC may not be available to them.

“Once you trigger the TBC by moving any money into retirement phase, your TBC stays with you for life. If you’ve fully used it already, none of the increase is available to you,” Mr Day said.

However, if you haven’t made full use of the TBC, you’ll get an increased amount based on the proportion of your TBC unused.

For example, someone who started an account-based pension in 2020 has a TBC of $1.6m. If, however, only $800,000 was moved into an ABP at that time, they’ve only used 50 per cent of their available TBC.

As a result, they would be entitled to 50 per cent of the TBC indexation increases.

For example, on July 1 their personal TBC would increase to $1.8m, leaving them with an available TBC of $1m.

Mr Day said the latest inflation data indicated there would be no increase in the contribution cap limits on July 1. This includes tax-deductible concessional and non-concessional contributions.

Currently at $30,000 per person, the concessional contribution cap is used as the basis for non-concessional contributions, which is the amount that can be paid into super where no tax deduction is claimed.

This figure increases in $2500 increments when the national average weekly ordinary time earnings figure increases by an appropriate rate.

The non-concessional cap is four times the concessional limit — currently $120,000 a year.

“We had a $2500 increase in the concessional cap from $27,500 to $30,000 on July 1 last year,” Mr Day said.

“The increase in AWOTE over the past 12 months, however, wasn’t enough to trigger an increase for the next financial year.”

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association