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Superannuation Technical Update: Tax Effective Transition to Retirement (Is this the end?) Sept 2016

The recent Federal Budget has turned superannuation income streams, in particular Transition to Retirement Income Streams (TRIS), on its head.

While there is no proposed changes to the way superannuation income streams are taxed at the personal level, the Budget proposes that effective 1 July 2017 all TRIS pensions will cease to enjoy the associated 0% tax rate on earnings derived in super.

Implications

What this means for us as advisers is that we must be alert to triggers of a “condition of release”.

Triggering such a condition will make the individual’s superannuation balance Unrestricted Non-Preserved and mean that the TRIS will automatically convert to an Account Based Pension.

This will enable your clients to continue to derive tax free earnings inside their super funds.

What is a condition of release?

“Conditions of release” are set out in Schedule 1 to the SIS Regs., and the conditions most relevant to clients in these circumstances are broadly as follows:

Retirement

Retirement is broadly defined in 2 ways, age dependant:

Where an individual is above preservation age (but below age 60), retirement is taken to occur where an arrangement under which the member was gainfully employed has come to an end; and the fund trustees are reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis.

Where an individual is above age 60, retirement applies where an arrangement under which the member was gainfully employed has come to an end, and either of the following circumstances apply:

  1. the person attained that age on or before the ending of the employment; or
  2. the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis.

In other words, for individuals aged over 60, “retirement” simply means that they change employers.

Gainful Employment is defined by SIS Reg 1.03 to mean being employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment – i.e. it is the same definition which also applies to the work test for individuals aged over 65.

Example:

Bob turns 60 on 1 November 2016. He is interviewing for a new job and secures one – it is time to negotiate a start date.
If Bob ceases his current position prior to 1 November 2016, he will not satisfy a condition of release. He negotiates and agrees to resign with a final day of 2 November 2016. As a result, his existing employment arrangement will cease after he has turned 60. This is sufficient for Bob to meet the definition of retirement and his entire superannuation will become unrestricted non-preserved.

Does a TRIS automatically change to a full ABP?

If an individual has (for example) attained age 65, or satisfied the definition of retirement, then any TRIS they have in operation will by default convert to an Account Based Pension.

Practical Implementation – tips and traps

More Information

Please do not hesitate to contact either Brenda Hutchinson or Jason Roccasalvo to discuss your particular client’s circumstances.

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