The July 2017 reforms brought with it significant changes to treatment of Transition to Retirement Income Streams (TRIS) within the SIS and Income Taxation regulations.
Pre July 2017
As a background a TRIS traditionally has allowed a member to access their superannuation once they reached preservation age without having to satisfy a full condition of release.
As with a full account based pension, the TRIS had a minimum payment requirement but with a 10% annual drawdown limit.
Prior to July 2017, earnings of taxable income on TRIS also enjoyed the same income tax exemption.
Post June 2017
From 1 July 2017, a TRIS no longer enjoys the benefit of income tax exemption the income derived by the assets supporting it (unless it is an Exempt TRIS – see below).
This is a result of a TRIS being excluded from being in “retirement phase”. Only pension interests in retirement phase are entitled to a pensions earnings exemption.
Advisors and members will no doubt be looking to see if the TRIS can meet the condition of an Exempt TRIS.
What is an Exempt TRIS ?
Section 307-80 ITAA 97 outlines when a TRIS will be “Exempt” (in retirement phase) and therefore qualify for pension earnings exemption.
A TRIS is an Exempt TRIST when a member meets one the following condition of releases per Schedule 1 of the SIS Regulations:
- Retirement
- Terminal medical condition
- Permanent incapacity
- Reaches age 65
Except for reaching age 65, the member needs to notify the Trustees in writing that a condition of release has been met before the TRIS can be exempt.
TRAP – An exempt TRIS will become subject to the transfer balance cap upon it becoming exempt. Review any potential issues with $1.6M cap.
Practical Treatments
- Do you need to put new pension documents in place to gain the benefits of the Exempt TRIS?
No. The ATO is of the view that the TRIS will continue, even when it becomes “exempt”. However a review of the documentation is essential to ensure it allows for the outcomes of the exempt TRIS.
- Does the 10% maximum payment limit apply to Exempt TRIS?
No. The definition of a TRIS removes the 10% maximum payment limit once it is an Exempt TRIS. However as discussed above, you need to check the pension documentation to ensure it provides for this mechanism.
- Does an Exempt TRIS automatically become a ABP when a condition of release is met?
The ATO’s view is that it does not. The Exempt TRIS will continue until it is ceased. If the member did wish to start a ABP, practically they would need to cease the TRIS (meeting all yearly payment requirements) and start a new ABP with new pension documentation.
Reversionary Beneficiaries
Consideration also needs to be taken where the TRIS has automatic reversionary beneficiaries. Based on current ATO views, in the event of the members death, the beneficiary recipient will also need to meet the conditions to receive an Exempt TRIS for the TRIS to continue to be paid to the beneficiary. This may require the TRIS to be commuted and the benefit paid out as a lump sum or a new ABP started.
No doubt the complexities continue.
We are here to help and welcome your call on 1300 TRISUP if you have any questions.