Expert SMSF insights
TRISs, death benefits and the technical flick pass
By Graeme Colley
The changes to transition to retirement income streams (TRISs) from 1 July this year blows the door off our understanding of TRISs as they were with ‘Simpler Super’ way back in 2007. Now, the ATO interprets SIS Reg 6 as ‘once a TRIS always a TRIS’.
This year’s changes introduce a ‘TRIS not in retirement phase’ and a ‘TRIS in retirement phase’. The income on assets that support the ‘TRIS not in retirement phase’ are taxable and a ‘TRIS in retirement phase’ are tax exempt. That concept is simple but getting from one to the other is not as simple as it may seem.
Shifting into retirement phase
A couple of things are required to move a TRIS into retirement phase.
As a pre-requisite, a specified condition of release, per section 307-10 of the Income Tax Assessment Act 1997 (ITAA ’97), must be met. These release conditions are retirement, terminal medical condition, permanent incapacity and reaching age 65.
Once a release condition is met, the fund must be formally notified, usually by the member. The exception to this is ‘reaching age 65’ – no formal notification is needed.
In the event of death
The release condition of ‘death’ is not referred to in s307-80, as a death benefit pension can never be paid to the deceased but only to a beneficiary such as a dependant or the legal personal representative of the deceased as defined in s10(1) of the SIS Act.
This creates a number of issues where a TRIS has a reversion included with it, as it is not possible for the beneficiary as reversioner to have the death benefit TRIS treated as a ‘TRIS that is in retirement phase’, unless they too have satisfied one of the specified conditions of release.
Where a specified condition of release has been met by the reversionary, they have up to 12 months to make a decision on what they wish to do. This can be illustrated in the following case:
Narelle, age 57 and Terry, age 60 are a married couple. Terry is employed part-time and draws a TRIS from his SMSF which provides a reversion to Narelle. Narelle ceased working five years ago. Terry dies. As Narelle has met a condition of release of retirement, she will have up to 12 months make a decision. When the 12 months is up the value of the death benefit reversionary pension will be measured against her transfer balance cap.
If, upon the death of the TRIS holder, the beneficiary has not satisfied a condition of release, then it must be commuted and credited to the deceased member’s accumulation interest in the fund. From there, the beneficiary can decide whether to take the amount as a lump sum or use it to commence a death benefit pension, subject to the beneficiary’s transfer balance cap. This can be illustrated in the following two cases:
Dina, age 58, and James, age 61, are a married couple. Dina is employed full time. James is in receipt of a TRIS and dies in a car accident on 1 November 2017. As Dina does not meet a condition of release it is irrelevant that James’ pension has a reversion. Dina could commence a death benefit pension, however, the value at the time it commences would be counted against her transfer balance cap. Under SIS Reg 6.21 the pension should commence as soon as practicable. At that time the pension would be measured against the beneficiary’s transfer balance cap.
Roger age 58 and Shane age 57 are a de-facto couple. They both work full-time and Roger is in receipt of a TRIS which is valued at $1,300,000. Roger dies and he also has an accumulation balance of $400,000. As Shane does not meet a condition of release, if he decides to commence a death benefit pension it will commence from the combined amount. As this amount is more than $1,600,000, Shane would be required to withdraw $100,000 as a lump sum with the amount of the death benefit pension depending on the amount he has measured against his transfer balance cap.
In these situations, the taxable and tax-free components of any death benefit pension may change from the TRIS. Let’s assume Roger’s TRIS is made up of a 60% taxable component, a 40% tax free component and the accumulation balance consists of a 100% taxable component. If Shane was to commence a death benefit pension, the taxable and tax-free components in accumulation and pension phase would be combined. The combined amount would result in a 73.75% taxable component and 26.25% tax free component.
Tip: The estate planning implications of these situations need to be considered particularly where the ultimate beneficiaries will be adult children.
Understanding what ‘retirement’ means
The changes to TRISs from 1 July 2017 have meant revisiting what is meant by the ‘retirement’ condition of release in SIS Reg 6.01(7) as it is one of the key events that will allow a beneficiary to access their super. As we are aware, the definition of ‘retirement’ differs somewhat from its natural meaning as it depends on whether the person is under or over age 60.
Reg 6.01(7) says:
…the retirement of a person is taken to occur:
(a) in the case of a person who has reached a preservation age that is less than 60 – if:
(i) an arrangement under which the member was gainfully employed has come to an end; and
(ii) the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis; or
(b) in the case of a person who has attained the age of 60 – an arrangement under which the member was gainfully employed has come to an end, and either of the following circumstances apply:
i) the person attained that age on or before the ending of the employment; or
(ii) the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis.
Gainfully employed is defined in SIS Reg 1.03 as “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.” The regulation defines ‘full time’ to mean gainful employment for “at least 30 hours each week” and part-time to mean gainful employment for “at least 10 hours, and less than 30 hours, each week.”
For anyone under 60, retirement has occurred where the person has ceased work and will not work in future for more than 10 hours per week. Anyone who is 60 can continue to work in other employment, even though they are treated as retired because they have ceased an employment arrangement. Therefore, anyone over 60 could cease one of two employment arrangements and meet the definition of retirement. However, for someone who ceased employment prior to reaching 60, they would need to convince their super fund that they didn’t intend to return to work for more than 10 hours each week when the employment ceased.
Retirement does not stop someone from later returning to work but Friday/Monday arrangements or a return to work in a similar position would probably have some issues with the regulator if questioned.
The rules around fund notification
Where a condition of release of retirement, terminal medical condition or permanent incapacity has been satisfied the TRIS will not be considered in ‘retirement phase’ until the pensioner has notified the fund that the condition has been met.
In contrast, a TRIS recipient who reaches 65 does not need to notify the fund and the TRIS automatically switches to ‘retirement phase’ status. If the member isn’t careful this may result in their transfer balance cap being exceeded, as in the following cases:
Merrick commenced a TRIS with $700,000 when he was 60. At age 63 he retired from one employment in which he was engaged which meant he had retired in terms of the definition of retirement in SIS Reg 6.01(7). The balance of his TRIS at retirement on 24 December 2017 was $720,000. However, Merrick did not notify the trustee of the fund until 31 March 2018 that he had actually retired on the previous December. The balance of the TRIS on 31 March 2018 was $730,000. For purposes of Merrick’s transfer balance cap, the value of the TRIS on 31 March 2018 would be counted as a credit against his transfer balance account.
Tip: Prior to notifying the fund or reaching retirement it may be worthwhile for Merrick to withdraw a pension payment from his TRIS as the balance will be reduced by the amount of the pension payment.
Issue: Should Merrick delay notifying the fund of meeting the condition of release for as long as possible?
Marcia reached 65 on 15 November 2017 and was in receipt of a TRIS at that time. As she is not required to notify the fund of her 65th birthday the TRIS will move into retirement phase at that time and be counted against her transfer balance cap.
Tip: Prior to reaching a client’s 65 birthday it may be useful to withdraw any pension payment so that a lower amount will be counted against their transfer balance cap.
The changes to TRISs that came into effect from 1 July 2017 certainly throw up a number of issues when it comes to including a reversion and whether the reversionary beneficiary meets a condition of release. Probably, the better planning strategy is to have the TRIS commuted as soon as the pensioner meets a condition of release and to use the amount to commence an account based pension. This will not bring with it the death benefit issues inherent with the payment of a TRIS and meeting the specified conditions of release.
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