Problems in passing on a TRIS as a death benefit solved by Parliament

The Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 was passed by both houses of parliament on 12 February 2019 — it resolves the quirk that in order to receive a retirement phase Transition to Retirement Income Stream (TRIS) as a death benefit, the dependant beneficiary must also be in 'retirement phase' e.g. reach 65 years of age.

Introduction

SMSF members can nominate how to distribute their super income streams to their pension dependants upon their death. A TRIS, being a super income stream, can only be passed on if it is in retirement phase i.e. the member has satisfied a condition of release. A quirk in the former legislation has meant that the pension dependant also needs to have met a condition of release in order to obtain the death benefit.

The former legislation explained

Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regs) which deals with cashing of a members death benefits states [emphasis added]:

'(2) The form in which benefits may be cashed under this regulation is any one or more of the following forms:

…

(b) subject to subregulations (2A) and (2B):

(i) one or more pensions, each of which is a superannuation income stream that is in retirement phase…'

Regulation 6.21 requires that only superannuation income streams which are in 'retirement phase' can be paid to dependant beneficiaries. The SIS Regs state that 'retirement phase' has the same meaning as that contained in the Income Tax Assessment Act 1997 (Cth) (ITAA97). ^[1] When looking at the ITAA97 it is apparent that there is an issue with this definition when it comes to paying a TRIS as a death benefit.

Section 307-80 ITAA97 requires that [emphasis added]:

'...A superannuation income stream from which a superannuation income stream benefit is payable is not in the retirement phase at a time if:

(a) the superannuation income stream is any of the following:

(i) a transition to retirement income stream...

and

(b) at or before that time, the person to whom the benefit is payable:

(i) has not satisfied a condition of release specified in paragraph (2)(c)...'

From this section, it can be seen that in order for the income stream to be 'in retirement phase', the 'person to whom the benefit is payable' — in this case, the dependant beneficiary — must have 'satisfied a condition of release'.

As such, a TRIS which has become a TRIS in retirement phase (i.e. after the member satisfied a condition of release) could only be passed on as a death benefit where the dependent beneficiary has also satisfied a condition of release.

Issue resolved by legislation amendment

The Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 resolves the issue by addition of the following subsection to section 307-80 ITAA97:

'(aa) the person to whom the benefit is payable is not a reversionary beneficiary; and'

The new legislation excludes reversionary beneficiaries from having to meet the requirement of being in 'retirement phase'. Meaning there are now no restrictions on a retirement phase TRIS being passed to a beneficiary as a death benefit.

When does it take effect?

The legislation applies retrospectively from 1 July 2017. This means that any payments of retirement phase TRIS's to dependant beneficiaries made after this date do not contravene super law.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

• Housing affordability and super: upcoming changes for first home buyers and 'downsizers'
• The reality of ageing SMSF trustees: death of an SMSF trustee
• What does it take to be removed as a SMSF trustee? Views from the NSW Supreme Court
• Corporate Trustee v Individual Trustee: Key Differences for SMSFs

Order related document packages

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• Update to SMSF
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• SMSF Investment Strategy
• Change SMSF Trustee (Cleardocs deed)
• Change SMSF Trustee (death of a trustee)