Tracey Scotchbrook, SMSF Specialist Advisor and Director of Superology, discusses how a recent legislative fix solved the problem of Transition to Retirement Income Streams (TRIS) ceasing to qualify for the exempt current pension income, unless it became a TRIS in the retirement phase. The Bill was first introduced on 28 March 2018 and finally passed Parliament on 12 February last month.
To say that 2017 was a big year for anyone involved with superannuation is an understatement. We saw the introduction of a raft of changes which came into effect from 1 July 2017. With it has come new concepts, terms and anacronyms. It hasn’t taken long for them to become firmly entrenched into the superannuation vernacular. But we also inherited some unintended consequences!
Transition to retirement income streams (“TRIS”) ceased to qualify for the exempt current pension income (“ECPI”) unless it becomes a TRIS in the ‘retirement phase’. The explanatory memorandum stated that ‘once a TRIS, always a TRIS.’ The legislation introduced to define when a superannuation income steam is in the retirement phase – section 307-80 of the Income Tax Assessment Act 1997 (ITAA97) – also expressly defines when an income stream will not be in the retirement phase.
What was not considered were TRIS paid to a reversionary beneficiary. The legislation as it stood would nothave enabled a TRIS to be reversionary unless the beneficiary themselves had satisfied a condition of release. This was quickly recognised as being an unintended consequence.
Without legislative change, beneficiaries were at risk of having to commute pensions in order to then start a death benefit pension. This could result in the mixing of different member benefits as well as the tax components. Depending on how a member’s superannuation accounts are structured and how death benefits are documented and intended to be paid, the mixing of benefits could have been a source of dispute. Further, unintended tax liabilities could arise for beneficiaries, particularly where TRISs have been used to create separate interests which have then been allotted to specific beneficiaries. The stopping of pensions would see the mixing of the various taxable and tax free amounts in an accumulation account melting pot.
The simple insertion of a single line to ITAA97 s.307-80(3), the definition of what is not a retirement phase pension has now resolved this problem:
“307-80(3)(aa) the person to whom the benefit is payable is not a reversionary beneficiary”.
The bill was first introduced on 28 March 2018 and after making its long journey through both Houses finally passed on 12 February 2019. The explanatory memorandum (“EM”) notes retrospective application is to apply and is necessary to ensure that those who have received or will receive a reversionary TRIS will equally benefit from the amendment and ensure that no breaches of SISR 6.21 will occur.
Retrospectivity according to the EM is to apply from 1 July 2017, being the commencement date of the legislation that uses the retirement phase income stream term. I expect we will see updated guidance from the ATO on the application of this amendment. ATO materials at the time of writing do not as yet reflect this legislative change.
Despite the loss of the ECPI tax concessions, TRIS are still a valuable planning tool in the right circumstances. But should a TRIS be reversionary?
Of course the answer to that question very much depends on a clients individual circumstances. Here are a couple of issues to consider.
A TRIS that is not in retirement phase does not count towards an individuals transfer balance cap. However a TRIS in retirement phase or that is a reversionary death benefit pension does and is reportable under the transfer balance account reporting (“TBAR”) regime. This requires careful planning when members with a TRIS satisfy a condition of release. Forward planning and restructuring is required to ensure that their pension accounts comply with the cap requirements prior to meeting the condition of release so as to avoid excess transfer balance cap amounts. Equal consideration needs to be given with regards to a reversionary pension.
For TBAR purposes, a reversionary pension is valued at the date of death but it is reportable in the period in which the date of death occurs. Reporting will be either quarterly or annually, however voluntary early reporting is available. For funds required to report quarterly, the TBAR lodgement must occur by the 28th day of the month following the quarter of the date of death. In difficult circumstances the trustee needs to ascertain the value of the members benefits as at their date of death in time for TBAR lodgement.
A concession does apply that allows the reversionary a 12 month period from the date of death to address any excess amounts and comply with the transfer balance cap limits. This applies equally, whether the pension is a TRIS or an account based pension.
In order to ensure that the pension can continue, it is essential that the minimum pension payments are made and continue to be made. Failure to do so will result in the pension conditions not being met. If a death benefit pension ceases it must be paid out of the superannuation fund to the beneficiary as a lump sum.
As Parliament is rapidly running out of sitting days, there was a fear that this necessary amendment would not make it through in time. It is a common sense amendment, a simple change to alleviate what was clearly an unintended consequence. A simple change to fix a significant problem.
Tracey Scotchbrook is a SMSF Specialist Advisor and Director of Superology Pty Ltd with 15 years’ experience. Early in her accounting career Tracey had the opportunity to work with self-managed superannuation funds, setting her on the pathway to specialisation. She is actively involved in the SMSF Association (“SMSFA”) and is the former WA Chapter Chair and National Membership Committee Member. Her accreditations include: SMSF Specialist Advisor (SSA) with the SMSF Association, CA and CPA SMSF Specialist, and Charted Tax Advisor with the Tax Institute. Tracey is a regular presenter to industry professionals and trustees, commentator, educator, and writer. In 2009 Tracey was awarded the Praemium Scholarship by the SMSFA. Contact Tracey at [email protected] or connect via LinkedIn or Twitter