A growing number of Self-Managed Super Funds may end up paying higher tax than needed because they miscalculate their Total Superannuation Balance (TSB) or Transfer Balance Cap (TBC).
Although the responsibility to get it right ultimately rests with the fund trustees, the complexity of the system highlights mounting frustration among SMSF holders and their advisers.
TSBs and TBCs were introduced on July 1, 2017, as part of one of the most significant superannuation reform packages in a decade. Back then, it all seemed relatively simple.
However, the sad truth is that super reform seems to inevitably bring greater complexity, more administration, and higher costs – all to the detriment of super fund members.
In this instance, what happened has been the introduction of multiple TSB and TBC thresholds that have made super more complicated.
Currently, the following different TSB thresholds apply:
- $300,000 TSB for work-test exemption contributions
- $500,000 TSB for catch-up contributions
- $1 million TSB threshold for quarterly transfer balance cap reporting
- $1.4 million, $1.5 million and $1.6 million bring forward non-concessional contribution caps
- $1.6 million TSB threshold for non-concessional, spousal, and co-contributions
- $1.6 million TSB threshold for segregated pension assets
Wait, there’s more. Some of these thresholds are indexed and some are not. The indexing methods also vary – all of which adds to the complexity and cost.
Remember, too, that each super fund member has their own personal TBC that determines the amount they can transfer into retirement phase income streams.
Initially, a personal cap will equal the general TBC in the year they first have a retirement phase income stream count against their TBC. Currently, this is $1.6 million.
The first indexation of the general TBC is expected to occur on July 1, 2021, when there is likely to be an increase of $100,000 to $1.7 million.
SMSF members who have not used their cap will be eligible for the maximum $1.7 million.
Individuals who have used a portion of their cap (based on their highest percentage usage) will fall somewhere between $1.6 million and $1.7 million and individuals who have used all their cap will remain at $1.6 million.
Individuals will be required to know their personal TBC maximum to avoid exceeding the amount they place into retirement phase, an exercise that involves negotiating a complex proportional indexation method.
These thresholds have not only made life far more difficult for SMSF members trying to understand and use the super system, but for their advisers and administrators. It also increases the professional services fees paid because they need specialised advice to understand the multiple different thresholds that may apply to them.
Adding to the difficulty is the fact many SMSF advisers are unable to access Australian Tax Office portals to facilitate efficient advice for their clients because it is restricted to tax agents.
So, what is need to simplify the system? There are many changes that would productively cut the red tape, but four stand out:
- Give all financial advisers registered with the Tax Practitioners Board access to their clients’ super data, subject to client consent
- Increase the work-test exemption TSB threshold to $500,000 to align it with the catch-up contributions threshold
- Phase out the $1 million quarterly TSB threshold for quarterly TBC reporting
- Remove the $1.4 million and $1.5 million TSB, bring forward non-concessional contribution (NCC) thresholds.
For SMSF members, being able to understand their legal obligations should not be an obstacle course.
What is required is a concerted effort by legislators and regulators to simplify a system that is becoming increasingly complex and unnecessarily costly to fund members.
Opinion piece written by
John Maroney, CEO,