Top Navigation

TRIS strategies after 1 July 2017

cash flowA transition to retirement income stream (‘TRIS’) provides an easy way to access superannuation savings.
Various TRIS strategies have developed in recent years which may change following the super reforms that commence on 1 July 2017. This article examines a number of popular strategies and considers the likely impact on TRISs on and after 1 July 2017.

For simplicity we refer to the term ‘pension’ in the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’) rather than the tax term ‘superannuation income stream benefit’.

What is a TRIS?

Before we discuss strategies, we will first examine what a TRIS is. A TRIS is based on the same regulations as an account-based pension, but comes with two extra restrictions on payment and commutation.

These two restrictions are:

  • A TRIS has a maximum pension payment in each financial year of 10% of the account balance. This 10% is generally determined on 1 July each year (or on the commencement date of the TRIS in the first financial year).
  • A TRIS cannot generally be commuted to a lump sum and cashed outside of the superannuation environment unless the member can already access the amount as a lump sum (ie, to the extent the amount is an unrestricted non-preserved benefit which generally arises when a member has satisfied a condition of release with a nil cashing restriction such as ‘retirement’ after attaining preservation age (as defined in reg 6.01(7) of the SISR)).

However, a TRIS can be commuted back into the accumulation mode at any time.

A TRIS can be commenced on merely attaining preservation age; importantly a member does not have to be retired to commence a TRIS. However, a member generally needs to be retired to commence an account-based pension.

If a TRIS does not meet the standards in the SISR in a financial year, both of the following apply according to the ATO in TR 2013/5:

  • the SMSF trustee is taken not to have been paying a pension at any time during the financial year; and
  • the TRIS ceases for income tax purposes.

In regards to the proportioning rule, the proportion of tax free and taxable components is ‘locked in’ at the commencement of a TRIS. This means that any earnings and capital growth on assets supporting a pension occur in proportion to the ‘locked in’ tax free component and the taxable component at the commencement of the TRIS. In comparison, earnings and capital growth adds to the taxable component if the member remains in accumulation mode.

SMSF tax in respect of a TRIS

Before 1 July 2017

A fund is exempt from the usual 15% income tax in respect of the earnings on assets supporting a pension, such as a TRIS.

From 1 July 2017

Earnings on assets supporting a TRIS will no longer be eligible for the exempt current pension income (‘ECPI’) exemption. Only retirement phrase pensions, such as account-based pensions, will be eligible for the ECPI exemption. A TRIS is expressly excluded from being in the ‘retirement phase’.

Member tax in respect of a TRIS

Before 1 July 2017

The taxable component of a TRIS is assessable income if the member is under 60. The member’s normal marginal tax then rate plus applicable levies applies with a 15% tax offset. Naturally, the tax free component of a TRIS is received tax free.

TRIS payments for a member 60 or over, are not assessable income and not exempt income (this is normally referred to as ‘tax free’). Such payments do not even need to be declared in the member’s tax return.

For years now, many have ‘crunched’ the numbers on the tax effectiveness of a TRIS. This has increased the attractiveness of salary sacrifice arrangements, where people see the potential tax savings that can arise from commencing a TRIS by reducing the salary they receive from their employer. This strategy was typically tied together with an arrangement where the person’s reduced salary (ie, sacrificed salary) is supplemented by TRIS payments so their overall cash flow was not reduced.

When a member attains 60, a TRIS becomes significantly more tax effective as TRIS payments received by the member become tax free.

From 1 July 2017

The tax treatment to a member does not change from 1 July 2017.

However, the tax efficiency of a TRIS is less attractive given there will be a 15% income tax applicable on the earnings on assets supporting a TRIS. However, for CGT assets held for more than 12 months, a 10% tax applies (after applying the one third CGT discount).

Employers and employees should also review salary sacrifice arrangements where salary has been sacrificed for additional employer superannuation contributions to ensure these arrangments are still appropriate.

Lump sum election

Before 1 July 2017

Broadly, an election to convert a pension to a lump sum is available until 30 June 2017. This election has been used by those under 60 to access the lump sum low rate cap (which is $195,000 for FY 2017). This has proven to be a popular strategy for many who may otherwise never access their low rate cap, eg, if they retire after 60.

Naturally, a member seeking to access their low rate cap must still comply with the annual 10% payment limit that applies to a TRIS that is discussed above.

This strategy has given rise to some uncertainty in recent times and numerous members have applied to the ATO for SMSF specific advice and private binding rulings to minimise risk especially if the SMSF claims ECPI using the segregated method. Alternatively, expert tax and SMSF advice should be obtained. As an aside, many large superannuation funds will not offer this election due to the uncertainty that has existed on this topic.

From 1 July 2017

The election to treat a TRIS payment as a lump sum is deleted. Thus, the strategy to access preserved benefits from a TRIS ceases and therefore members under 60 will generally no longer be able to access their low rate cap from a TRIS.

Transfer balance cap

Before 1 July 2017

Not applicable as the transfer balance cap and transfer balance account measures commence from 1 July 2017.

From 1 July 2017

A transfer balance cap of $1.6m limits the total amount of superannuation assets that a member can transfer to the retirement phase that will qualify for the ECPI exemption from 1 July 2017 (ie, the tax free pension phase). This $1.6m transfer balance cap limit will be indexed in future years.

Since a TRIS account is not in retirement phase, it will have no transfer balance cap impact. However, when a TRIS converts into an account-based pension, then transfer balance cap measures apply.

CGT cost base election

Before 1 July 2017

Broadly, the object of the CGT cost base election is encapsulated in s 294-100 of the Income Tax (Transitional Provisions) Act 1997 (Cth), which provides that the CGT cost base election is to provide temporary relief in respect of members complying with the introduction of the transfer balance cap and the loss of the ECPI exemption in respect of assets supporting a TRIS. Further information on this topic is available in our article titled, ‘Transitional CGT relief for pension and TRIS assets for FY2017’, which can be accessed by clicking here.

From 1 July 2017

The CGT election is temporary and relates to the reset that applies before 1 July 2017. The election — which applies on an asset by asset basis — for cost base reset must be lodged prior to the SMSF trustee’s FY2017 tax return.

Succession planning

Before 1 July 2017

On the death of a member, a reversionary pension (including a TRIS with the appropriate documentation) can be paid to that member’s dependant. This is subject to the dependant beneficiary being automatically entitled under the SMSF deed and the rules governing the pension. The ATO in TR 2013/5 provides that both SMSF deed and the rules governing the pension must specify the person to whom the benefit will become payable and that it will be paid in the form of a reversionary pension.

From 1 July 2017

For SMSF succession planning, it was stated in the explanatory memorandum to the new super reforms that the government intends to amend legislation so that a TRIS can no longer be transferred to a reversionary beneficiary on the death of a member; only other pensions such as account-based pensions can continue to be paid to a reversionary beneficiary. Many members with a TRIS that have planned to revert their TRIS on their death to their surviving spouse will therefore need to revise their SMSF estate planning.

On death of a member who is only in receipt of a TRIS, they would have met a ‘full’ condition of release and thus a new account-based pension can be commenced as a death benefit for the deceased member’s dependant/s. With the new transfer balance cap, this will also mean that the deceased member’s death benefit that is used to commence an account-based pension for say the surviving spouse will count as a credit towards the dependant’s transfer balance account. For more information on death benefit pensions and the transfer balance cap, please see our article titled, ‘Death benefit pensions and the $1.6 million transfer balance cap’, by clicking here.

Conversion of a TRIS to an account-based pension

Before 1 July 2017

Members in receipt of a TRIS who satisfy the relevant ‘full’ (or nil) condition of release (eg, the member has reached their preservation age and retired), will generally be interested in converting their TRIS to an account-based pension to obtain a pension exemption after 1 July 2017. The SMSF trustee needs to carefully review the SMSF deed and pension documents to see if the TRIS can be converted to an account-based pension. Some document suppliers unfortunately draft their documents in a way that requires a TRIS to be commuted before an account-based pension can commence.

From 1 July 2017

The ATO will be on the lookout for people who seek to ‘manufacture’ their cessation of gainful employment to obtain the ECPI exemption in respect of a conversion of their TRIS to an account-based pension.

It is also worthwhile seeking a quality supplier of documentation to minimise the paperwork and steps involved in this conversion process. It is generally best to consider a TRIS supplier that offers automatic conversion to an account-based pension as soon as a condition of release with a nil cashing restriction applies, eg, retirement after preservation age or attaining age 65.

Conclusions

The reform measures impacting TRIS strategies are much more far reaching that initially thought. A major rethink is needed on the appropriateness of each TRIS strategy moving forward. We recommend every member with a TRIS be approached and members who are eligible who do not have a TRIS should also be reviewed to see if they should have one. Naturally, the right documentation and quality advice should be obtained to ensure the best strategies are implemented.

To get a broad snapshot of the other super reforms commencing on 1 July 2017, our article titled, ‘Superannuation reforms – a snapshot as at 20 December 2016’, is available by clicking here.

* * *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Print Friendly, PDF & Email