By Mark Ellem
There is growing speculation that changes will be made to the taxation treatment of Transition to Retirement Income streams (TRISs) in this year’s Federal Budget, which has now been brought forward to May 3. These changes may see a reduction in the tax benefits which currently apply to these pensions and associated strategies.
Whatever changes are announced to TRISs, we believe it is unlikely those changes will apply to TRISs which were commenced prior to this year’s Federal Budget. The Treasurer has previously stated that the Government will not be making changes to the superannuation tax concessions which adversely impact on those who are already in the pension phase.
This means clients, who have attained their preservation age, have an opportunity to commence a TRIS before this year’s budget and lock in the existing tax benefits associated with these pensions.
If no changes are announced to TRISs in this year’s Federal Budget, the adverse consequences of having commenced a TRIS in anticipation of changes are likely to be minor. Some administration costs may be incurred when the TRIS is commenced and if the TRIS is subsequently commuted and the proceeds rolled back to the accumulation phase. It is also a legislative requirement that your client is paid their pro-rated minimum pension payment for the financial year prior to the commutation taking place.
The Opportunities information panel on the SuperMate Home Dashboard provides you with convenient detailed information about which of your clients are eligible to commence a pension, including a TRIS. Simply flip the Opportunities information panel and click on “Eligible for Pension” and SuperMate will show you a list of fund members who have reached their preservation age and have an accumulation account. You can filter on this screen within SuperMate or export to excel for further analysis.
This type of pension is defined in SIS regulation 6.01(2) and is basically an account based pension, which can commence once a person attains their preservation age (noting that the preservation age increased to 56 on 1 July 2015). Whilst the minimum pension calculation and payment requirement is the same as an account based pension, there are a couple of restrictions being:
To show that the TRIS commenced before the Federal Budget (assuming any announced changes would be effective no earlier than Budget night), you will need appropriate documentation to substantiate when the TRIS did commence. In relation to when a pension commences, TR 2013/5 explains that:
Whilst the superannuation law allows a person, who has reached their preservation age, to access their preserved benefits in the form of a TRIS, a member cannot take advantage of the law if the SMSF’s trust deed does not provide for this type of pension. The law allowing for this type of pension came into effect from 1 July 2005, so any trust deeds that are older than 2005 may not have the relevant provisions to allow a member to commence a TRIS. More recent trust deeds should also be checked to confirm that they provide for a TRIS.
Yes, a TRIS can be ceased and effectively “rolled back” to accumulation. Whilst some may take this to be a non-allowable commutation, as the cessation of the TRIS does not result in a payment outside the superannuation system, that is, a lump sum benefit payment, it is permitted.
For a TRIS, the maximum allowable pension payment is 10% of the balance of the TRIS as at 1 July or if the TRIS commences during the income year, the value of the TRIS at commencement. Unlike the requirement to apportion the minimum pension, where it commences other than on 1 July, the 10% maximum pension for a TRIS is not required to be so apportioned. This means that no matter when a TRIS commences during the first income year, the maximum allowable draw down amount for the year is 10% of the commencement value of the TRIS.
For example, Susan, aged 61 and still working full time, commences a TRIS on her account balance of $600,000 on 1 March 2016. Whilst her minimum pension percentage factor is 4%, which results in a calculated minimum pension amount of $24,000, as the pension did not commence on 1 July, it must be apportioned and consequently the required minimum pension is $8,000. However, Susan’s maximum TRIS allowable amount is $60,000, being 10% of her commencement value and does not have to be apportioned, even though it did not commence on 1 July.
Whilst this applies when commencing any type of pension, it will be of particular importance if starting a TRIS prior to any announced changes in the Federal Budget. Prior to commencing a pension, which includes personal contributions made by the member, any notice of deductibility, in relation to those personal contributions, must be provided by the member to the superannuation fund trustee. Contributions received by a fund from a member are treated as non-concessional unless a notice of deductibility is provided. If this notice is provided after the pension commences, the notice is invalid and the member is unable to claim an income tax deduction in respect of the personal contributions.
As discussed above, there is the option to cease the TRIS, simply by affecting a “roll back” to accumulation. However, prior to the cessation of the pension, which would be a full commutation, there must be a proportionate minimum pension payment paid prior to the TRIS ceasing.
Where payments from a TRIS are treated as lump sum benefit payments, due to failing to pay the minimum pension or exceeding the maximum 10% pension limit, the fund will have contravened the preservation rules and the recipient of the pension will be taxed on 100% of the amounts received at their marginal tax rate, in accordance with section 304-10 ITAA 1997. There is no reference to the age of the recipient or the tax components of the benefit payment, that is, being over age 60, having a tax free component and the 15% pension tax offset are all irrelevant.
In the ATO’s SMSF Determination 2014/1, it explains that a partial commutation of a TRIS can be taxed as a lump sum. However, the TRIS must have sufficient unrestricted non preserved (URNP) monies to permit the partial commutation. For further discussion on this issue please refer to my blog article “Pension payment treated as lump sum saves tax”.
In a recently issued PBR, the ATO has confirmed that a member who has commenced a TRIS, with no URNP monies, can still elect for the payment from the TRIS to be taxed as a lump sum, without the requirement for a partial commutation. For further discussion on this issue please refer to my blog article “TRIS payments taxed as lump sum, but it’s all preserved!”.
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