Published May 2017 by Sharon Hope CPA, SMSF Auditor Online
From 1st July 2017, formal changes to the Australian superannuation system will come into play. In this article, we’ll deal with what you may need to know about managing your super for the next financial year, and as you transition to retirement. Furthermore, we’ll provide relevant links to the ATO website for easy access to the official information.
But first, what is a TRIS?
A ‘transition to retirement income stream’ (TRIS) is an income paid to you from your self-managed superannuation fund while you're still earning from employment. This means that as you reduce your working hours you can still maintain your standard of living, as you top up your work income with a regular ‘income stream’ from your SMSF. To access a TRIS you must have reached ‘the age of attainment’ (soon to be 57 years old) and have not yet reached 65. You can arrange a TRIS to come from all or part of your superannuation entitlement. You can access up to 10% of your superannuation account balance each year, as your TRIS, without retiring. For example, if you’ve got $100K in your account, then you can draw a $10K income from that per year. If you’re under 60 years of age, this TRIS income is taxable, but if you’re over 60 the TRIS income is not subject to income tax. When you reach the conditions to receive a full account based pension paid from your superannuation fund – that is, you’re 65+ or you’re over 60 and retired – then you no longer need a TRIS.
Changes to tax on TRIS-related asset earnings
From 1st July 2017, the government will apply a 15% income tax on earnings from superannuation fund assets used to support a TRIS. Previously, the earnings from the assets used to support a TRIS were tax exempt. Fund assets allocated to providing a full account-based pension will remain tax exempt after 1st July 2017. If, for example, you have a super fund split 50:50 between two members, with half the fund asset supporting a full account-based pension of a 60+ retiree, and half supporting a TRIS of a 57-64 year old, part-time employed, non-retiree. After 1st July 2017, the earnings from the assets used to provide the TRIS will be taxed within the fund. Furthermore, there’s no change to personal income tax conditions when you receive a TRIS. However, a TRIS may become a less attractive tax management strategy given the 15% income tax on the earnings contributed by the assets supporting the TRIS.
Another change to retirement income streams
From the 1st July 2017, treating TRIS retirement income stream payments as lump sums for taxation purposes will no longer be possible. These changes to TRIS are aimed to improve the integrity of retirement incomes from superannuation. For self-managed superfunds, the 15% income tax and no lump sum treatment means that ‘exempt current pension income’ (ECPI) can no longer be claimed from assets supporting a TRIS. Plus, any income generated from assets supporting a TRIS will be tax assessable. Further, to re-establish an ECPI, the TRIS will need to be substituted by a new income stream arrangement.
More choice for retiree income streams
To offer flexibility and more choice to retirees managing the risk of outliving their retirement savings, the rules restricting the development of new retirement income products will be lifted.
In short, the tax exemption on earnings made from your superannuation’s retirement phase will also be extended to products you may decide to implement, such as a deferred lifetime annuity or group self-annuitisation products.
This will apply from 1 July 2017. The flow-on effects may include more SMSF members investing in retirement income products.
Furthermore, SMSFs will need to report the value of retirement income products, when exempt current pension income (ECPI) is claimed, to address the transfer balance cap on the fund’s pension phase.