Article

Higher inflation…not all bad news.

27 July 2023

While it is true that there is a lot of concern about how inflation affects the cost of living and investment markets, there might be a silver lining for those seeking to build wealth in the tax-advantaged realm of superannuation.

You would expect with contribution limits being indexed and inflation reaching levels not seen in decades, we would have seen significant increases to the contribution rules. However, the complexity of the superannuation system comes into play, with different indexation methods being applied to different limits. Two commonly used indexes in the superannuation system are the Consumer Price Index (CPI) and Average Weekly Ordinary Time Earnings (AWOTE). Their growth profiles are detailed below.

No impact on the superannuation contribution limits

The standard superannuation contribution limit of $27,500 remains unchanged for the 2023/24 financial year as it is indexed to AWOTE, which experienced relatively subdued growth during the calculation period. Furthermore, as personal non-concessional contributions (where a tax deduction is not claimed), are four times the standard contribution limit, also remains unchanged at $110,000. Therefore the ‘Bring Forward‘ rule allowing 3 years of non-concessional contributions to be made in a single year remains at a maximum of $330,000.

What has changed is an individual’s eligibility to make contributions to superannuation and the amounts which can be transferred into a Tax-Free pension.

Contribution eligibility

To be eligible to make non-concessional contributions, an individual’s Total Superannuation Balance (TSB) as at 30 June of the previous financial year is required to be under a certain threshold. The Total Super Balance is indexed with the CPI and therefore experienced a significant jump. The following table outlines the maximum non-concessional contributions that can be made based on the individual’s TSB:

Maximum Non-concessional contribution	Total Superannuation Balance (TSB) as at 30 June 2022	Total Superannuation Balance (TSB) as at 30 June 2023
$330,000 (Full bring forward)	<$1,480,000	<$1,680,000
$220,000 (Partial bring forward)	$1,480,000 – $1,589,999	$1,680,000 – $1,789,999
$110,000 (No bring forward)	$1,590,000 – $1,699,999	$1,790,000 – $1,899,999
Nil	$1,700,000+	$1,900,000+

When combined with the revised age restrictions which took effect from the 2022/23 financial year, allowing individuals aged 74* or younger to make contributions without meeting a work test, there are significant additional planning opportunities emerging. Such changes may be especially appealing to those looking to enhance the tax efficiency of their superannuation/pension when it is ultimately inherited by adult children as well as those aiming to minimize investment earnings in their personal name.

More in tax free pensions

Another significant beneficiary of the CPI indexation was the Transfer Balance Cap (TBC). The Transfer Balance Cap is the amount individuals can transfer from superannuation phase into a tax-free pension. As a result of the indexation, individuals can transition an additional $200,000 with the new limit being $1.9m for 2023/24.

It is important to note, where an individual has already utilised their full cap, they do not receive any additional indexation. Where an individual has used part of their TBC, the indexation value is proportioned to the amount of the TBC unused.

The indexation to the Transfer Balance Cap (TBC) means that individuals moving into retirement are able to transfer considerably more into the tax-free environment, help to improve after tax returns for investors.

To find out more, please contact your adviser.

*Contributions can be received up to 28 days the month following the individual turning 75.