Nick Bruining: Why rising inflation is so good for superannuation contributions and the transfer balance cap

While Australia’s December inflation data confirmed the price rises being experienced by everyone, there’s a hidden silver lining for those contributing to superannuation. The quarterly consumer price index figure came in much hotter than expected at an annual rate of 3.8 per cent. The other key measure used in the superannuation system — average weekly ordinary time earnings (AWOTE) — will be released later this month. CPI is used to increase the transfer balance cap and AWOTE, the superannuation contribution caps. The December CPI figure and other indicative wage data all but confirms that all superannuation limits are set to rise on July 1. The concessional contribution cap is increased in $2500 increments when the AWOTE figure increases to a point where the next level is reached. The last increase — from $27,500 to $30,000 — was on July 1, 2024. With this probable increase, the concessional contribution cap could lift from $30,000 to $32,500. Concessional contributions are those contributions where someone gains a tax concession, usually because of a tax deduction. This figure includes compulsory employer contributions, salary sacrifice arrangements and personal contributions you might claim as a tax deduction yourself. Bear in mind that all concessional contributions are subject to a contributions tax of at least 15 per cent and, in some cases, 30 per cent when your income exceeds $250,000 a year. Importantly, and under the five-year “carry over” concession, the maximum possible tax-deductible contribution for a single payment to superannuation could be as much as $175,000 after July 1 this year. The new concessional contribution cap will flow through to the non-concessional contribution limits. This figure is tied to four times the non-concessional cap, so the current limit of $120,000 a year would increase to $130,000. That would then flow through to the “bring forward” rule, which allows someone to bring forward up to three years of non-concessional contributions. Currently at $360,000, that is likely to rise to $390,000 after July 1 this year. There is no change to the super downsizer limit, which remains at $300,000 per person. Super downsizer contributions are available once you reach the age of 55. Importantly, they do not count towards any contribution caps. Theoretically, a couple with minimal superannuation who are in a position to max-out all of the limits could make a single combined contribution to super with the proceeds of their home sale of a combined $1.73 million. The other big increase that is now locked in thanks to CPI is the transfer balance cap. The cap specifies the amount that can be transferred from an accumulation phase super account — that’s the typical super fund you have while working — into a tax-free retirement phase account, typically an account-based pension. Once established, the TBC is set for life. The current limit of $2m will increase to $2.1m from July 1 this year. The TBC system commenced in 2017 and at the time was set at $1.6m. Someone who started an ABP in that financial year still has the $1.6m cap. They cannot access the increased amounts that have applied since that date. However, for someone who has not fully exploited their TBC, they will receive the proportional benefit of the increase since their TBC was locked in. Let’s say, for example, someone established their TBC in 2018 by commencing an ABP with $800,000. That $800,000 was 50 per cent of the available $1.6m TBC at the time. From July 1 this year, when the TBC increases to $2.1m, they can still access their unused 50 per cent — or $1.05m. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association