By Graeme Colley
This article has also been picked up by the Switzer Super Report.
Anyone who has a transition to retirement income stream (TRIS) should be aware of a number of implications if the proposals announced in this year’s Federal Budget take place from 1 July 2017. Stopping work after 1 July 2017 or starting a short-term job which ends after age 60 are just a few things that could catch anyone out unexpectedly.
Under the current rules any income earned on investments made by the superannuation fund and used to start a TRIS is tax free. For anyone between preservation age (currently 56) and 60 the taxable amount of pension payments received by the fund member is taxed at personal rates and receives a 15% tax offset. For anyone who is at least 60, the pension payments are tax free when received from the fund.
From 1 July 2017 the rules will change so that any income earned by the superannuation fund on investments used to support the payment of the TRIS will be subject to tax at the fund’s standard 15% tax rate. A TRIS will be treated as being in accumulation phase from that time rather than retirement phase as it is under the current rules. There will be no change to the taxation of the TRIS when received by the member.
Another change is the proposed introduction of the $1.6 million transfer balance cap. The cap applies to amounts transferred to retirement phase and used to start an income stream. This applies to account based income streams and other pensions such as lifetime and life expectancy complying pensions. It does not apply to amounts used to start a TRIS as they form part of the amounts in accumulation phase. Once the pension cap has been exceeded the excess is required to be transferred back to accumulation phase. This will usually take place by transferring various fund investments from retirement phase to accumulation phase. The excess will be liable to a tax penalty for going over the cap.
Where a member has reached a condition of release such as retirement or reaching age 65 the balance of the TRIS at the time the person retires or reaches age 65 will be counted against the $1.6 million transfer balance cap. This is where people need to watch out as it is possible for a person to go over the $1.6 million transfer balance cap without their knowledge. It can happen to anyone merely because they have stopped a part-time or casual job once they are between 60 and 65.
Let’s consider 62-year-old Trevor. Trevor has a balance in his superannuation fund of $1.7 million. He has a full-time job as a sales manager and decides to take time off to work for the Electoral Commission on a casual basis to assist at the polling booths on election day. The work for the Electoral Commission lasts for a few weeks and usually ends after all the votes have been counted. As Trevor is at least 60 years old and stopped his work with the Commission, he is considered to have retired. In this situation Trevor meets the retirement condition of release and the TRIS he was receiving will auto-convert to an account based income stream. The balance of the account based income stream will be counted against the $1.6 million transfer balance cap. As Trevor has exceeded his transfer balance cap by $100,000 it will be subject to an interest penalty.
Anyone who has commenced a TRIS and is nearing 60 or older needs to be aware of the issues relating to their superannuation that could arise if they are nearing retirement or when they reach age 65. If the proposed changes become law, it would be worthwhile for an individual to have their situation reviewed so they don’t get caught out. This should be done before the proposed changes come into effect and each time a change in their work circumstances occurs.
