An amendment to the new superannuation rules has clarified the position of transition to retirement income streams after July 1, in a move that has been welcomed by the superannuation industry.
From July 1, the tax exemption for transition to retirement income streams will end. TRIS money will be treated as if it were in accumulation, with fund earnings subject to tax.
Under the changes as originally passed, if a pension started as a TRIS the pension income tax exemption could never apply, even where the pensioner subsequently satisfied a condition of release with no cashing restrictions. This gave rise to the view that “once a TRIS, always a TRIS.”
The amendment, which was passed earlier this month, changes this situation. Income from assets that support a pension that started as a TRIS will be eligible for the pension income tax exemption after July 1 if the member has turned 65 or has satisfied the retirement, terminal illness or permanent incapacity conditions of release.
In other words, a TRIS will become a tax-exempt retirement phase income stream when the member satisfies the condition of release with no cashing restrictions.
In a note to clients, Scott Hay-Bartlem, the leader of the commercial team at Cooper Grace Ward, and Clinton Jackson, a partner in the commercial team at the firm, warn that it is still not all plain sailing. The exemption will only apply if the member has notified the SMSF.
This part of the process only occurs automatically if the member turns 65. In cases where the condition of release is retirement, terminal illness or permanent incapacity, the pensioner must provide the SMSF with appropriate supporting documentation to confirm the conditions of release.
Also, the trust deed must be drafted to allow for the removal of TRIS restrictions once the condition of release with no cashing restrictions has been meet.
If the TRIS restrictions are not removed legitimately, the SMSF will be in breach if the member draws more than 10 per cent of their opening balance as a pension payment or commutes the pension to a lump sum.
If the pension documents or trust deed do not provide for the removal of TRIS restrictions, a more complicated solution may be required, such as stopping and restarting the pension.
Hay-Bartlem and Jackson say all TRIS documents should be reviewed to ensure restrictions will cease automatically.
Graeme Colley, executive manager SMSF technical at SuperConcepts, agrees that the amendment is a good outcome. “If the situation had remained as it was all TRIS arrangements would have sat outside the retirement phase in perpetuity.”
Transition to retirement income streams were introduced into the superannuation system about a decade ago as a way of encouraging people to stay in the workforce longer.
A fund member who has reached preservation age can set up a TRIS to draw down on their superannuation interests before they retire from the workforce.
TRIS restrictions include no commutation and maximum annual pension payments.