Tax free TRIS? — ATO delivers a private ruling on tax treatment of transition to retirement income streaming

For those aged under 60 and thinking of transitioning to retirement, the ATO has published some welcome news regarding the tax treatment of payments from transition to retirement income streams.

A recent ATO Private Binding Ruling1 (Ruling) indicates that where a certain election is made, the ATO may treat payments from a transition to retirement income stream as a lump sum payment for tax assessment purposes, even if it is still treated as an income stream payment for superannuation purposes.

 

Overview

The Ruling opens the door for persons who have reached preservation age but are not yet 60, and who have only (or predominantly) preserved benefits in their super, to elect to have some of their pension payments:

  • treated for tax purposes as the payment of a lump sum; and
  • taxed by reference to the low rate tax cap rather than marginal tax rates (less the offset).

Caution should be applied in relying on the Ruling as it is an advice from the ATO which, although binding on the ATO, only applies to the specific taxpayer and circumstance set out in the initial ruling application.

What is a transition to retirement income stream (TRIS)?

The eligibility threshold for a TRIS is that a recipient must have reached their preservation age (55-60 years of age, depending on date of birth) — the minimum age from which a person can access preserved superannuation benefits without necessarily satisfying other conditions of release2.

Accordingly, a TRIS:

  • provides people with access to their super before they retire — and while they are still working — but after they have reached their preservation age; and
  • is paid as a pension, and supplements income derived from employment.

The TRIS is an account-based pension paid as an income stream that is regulated under the Superannuation Industry (Supervision) Act 1993 (Cth) and the associated regulations (SIS Law). The rules for a TRIS include that:

  • the total amount of payments made to recipients must meet the minimum annual pension payment requirement;
  • annual payments cannot exceed 10% of the value of the person's superannuation balance; and
  • for SIS Law purposes, the pension may be commuted — and a lump sum cash payment made to the pensioner — only if it is funded from the person's un-restricted non-preserved amounts of superannuation. Accordingly, such commutations are generally partial commutations of the pension.

The key consideration — for the purposes of understanding the Ruling — is that under SIS Law a TRIS cannot be commuted to a lump sum and cashed out to the pensioner before the person 'retires' (or satisfies some other release condition with a 'Nil' cashing restriction). The exception to this is unrestricted, non-preserved benefits, which can be paid out as a lump sum. While this is possible, not many people under the age of 65 have unrestricted, non-preserved super and therefore many are ineligible for the lump sum payment.

How are TRIS payments taxed?

The Income Tax Assessment Act 1997 (Cth) and associated regulations (Income Tax Law) state that payments made as a pension are treated as 'superannuation income stream benefits' and therefore subject to taxation treatment as income3. In the context of a TRIS paid to a member under 60 years of age, this means that the pension income is taxed at the person's marginal tax rate, less a 15% tax offset.

However, the exception to this rule — which is explored by the Ruling — is Regulation 995-1.03 of the Income Tax Assessment Regulations 1997 (Cth) (ITAR 1997), which provides that an election may be made to exclude certain TRIS payments as income and rather, treat them as a lump sum payment, taxed at the low rate tax cap.

For FY 2015—16 the low rate tax cap for a lump sum pension payment is 0% tax up to $195,000.

What was the accepted tax treatment of TRIS payments prior to the Ruling?

Prior to the Ruling, the ATO's position and the approach adopted by the industry in relation to the tax treatment of TRIS payments was as follows:
  • under Income Tax Law, TRIS payments are generally taxed at the marginal rate less the 15% tax offset;
  • pension payments may be considered as a lump sum payment — and benefit from being taxed at the low rate tax cap — if:
    • for SIS Law purposes, the pension is able to be, and is, partially commuted to a lump sum payment; and
    • in respect of that payment, the pensioner elects under the Income Tax Law to have the pension payment excluded from tax treatment as an income stream;
  • however, because SIS Law only allows a pension to be commuted in respect of (relatively uncommon) unrestricted, non-preserved superannuation, it was generally accepted that TRIS payments:
    • could not be treated as lump sum payments; and
    • could not access tax at the low rate tax cap.

What is the potential tax treatment of TRIS payments following the Ruling?

In accordance with the Ruling, the ATO does not consider there to be a link between:

  • the pensioner satisfying the limitations under SIS Law regarding partial commutation of the TRIS; and
  • the pensioner being eligible to make an election for the pension payments to be treated as a lump sum.

Therefore, even if the pensioner:

  • has no un-restricted, non-preserved benefits in super; and
  • has no right under SIS Law to commute the TRIS;

then provided that Regulation 995-1.03 is complied with, a person may:

  • elect under Income Tax Law for a payment to be considered as a lump sum benefit; and
  • thereby access the low rate tax cap in respect of that benefit.

What does this mean for you and your TRIS?

The Ruling strictly applies to the specific taxpayer subject to the Ruling. However, it indicates to the wider community that the ATO may accept this tax strategy.

The significance of this Ruling is that:

  • persons aged between 55 and 60 need not necessarily have un-restricted non-preserved superannuation in order to elect to have certain pension payments treated as lump sum payments for tax purposes; and
  • those persons may, by making that election, have those payments assessed for tax at the low rate tax cap rather than their marginal rate (less tax offset).

For example, if a person's minimum annual payment requirement for an account-based pension is $50,000, that person:

  • may accept payment of that amount to them as pension payments for SIS Law purposes; and
  • may elect for tax purposes to have the pension amount treated as a lump sum payment and therefore taxed at the lower rate up to the low rate tax cap.

For those who are planning their transition to retirement, or considering this financial strategy, it is recommended they make an application for a private ruling that is binding on their specific circumstances.

If you are unsure about superannuation pensions, you should obtain financial and/or legal advice.

Essential superannuation resources

Stay on top of the never ending changes affecting superannuation with the following resources from Thomson Reuters: The Essential SMSF Guide and the Australian Superannuation Handbook. Available in book, ebook and online.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the superannuation team.

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[1] ATO Private Binding Ruling 1012925066548 issued 8 December 2015.

[2] For those born before 1 July 1960, the preservation age is 55. The preservation age of those born on or after 1 July 1960 is higher.

[3] ITAA 1997 307-70(1).