By Mark Ellem
Long before the ATO issued its Guidance Note 2019/1 in relation to transition to retirement income streams (TRIS), there’s been debate about whether a TRIS automatically converts to an account based pension (ABP) once the member meets a condition of release with a nil cashing restriction, which at the very latest is attaining age 65. In its guidance note the ATO confirms its view that a TRIS remains so even once the member has satisfied a condition of release with a nil cashing restriction. It does not automatically convert to an ABP, even though the 10 per cent maximum drawn-down and non-commutability restrictions fall away.
I agree that a TRIS does not automatically convert to an ABP once the member satisfies the relevant requirements. However, my reasoning is that it was always an ABP in the first place and consequently does not need to convert to something it already is.
A TRIS is defined in the SIS regulations, specifically regulation 6.01. Without quoting the actual legislation and getting bogged down in technicalities, I read the definition as stating that a TRIS is a pension that satisfies the very regulation that provides for an ABP – regulation 1.06(9A). This is the same regulation that the definition of an ABP, in regulation 1.03, refers to. The only difference is the definition of a TRIS in regulation 6.01 also imposes a 10 per cent maximum on drawdowns and requires the pension to be non-commutable. So, when a member with a TRIS meets a condition of release with a nil cashing restriction, the restrictions in the TRIS definition effectively fall away and what are you left with? An ABP, that’s what.
Now, we can continue to get bogged down in the debate, but the ATO has made their legal interpretation clear. However, this is causing confusion amongst pension members. I’ve had many a client meeting where I’ve been asked to explain the differences between a ‘TRIS in retirement phase’, which clients have never heard of, and an ABP. When I explain that from a practical perspective a TRIS in retirement phase is an ABP they inevitably ask, “Then why isn’t it called an ABP”. Why indeed? All I can reply is that it’s the law, but if they want it to be an ABP, they have to go through the process of commuting and restarting, which besides the paperwork and costs, could mean a detrimental outcome due to potential change in tax components.
This outcome is the same for a deceased member whose TRIS reverts to their spouse. Here, the spouse acquires a ‘death benefit TRIS in retirement phase pension’ – a what? Well, it’s just an ABP. If the member had died with just an accumulation account, then the death benefit pension would be described as an ABP. It’s just ludicrous.
In the spirit of making superannuation law easier to understand, it would make sense to simply change the law to allow a TRIS to be called an ABP once the member has met a condition of release with a nil cashing restriction. The relevant rules are contained in the superannuation regulations. Changes to regulations or new regulations can be made without going through parliament, so, there’s no need to shore up the numbers in the senate. Yes, regulations can be rejected by either house, but that rarely happens.
So, let’s focus our effort away from the debate on the ATO’s view of a TRIS, and ask the government to make a simple change to clear up a lot of confusion for us and, more importantly, our clients.