Estate Planning

TRIS conversion could cause cap problems

SMSF trustees need to be cautious that the new treatment of transition-to-retirement income streams (TRIS) does not lead to a breach of the transfer balance cap (TBC) introduced on 1 July, a senior SMSF technical practitioner has said.

Under the new superannuation laws, a TRIS no longer has exempt income status, with the revenue generated from supporting assets now taxed at 15 per cent. It effectively means a TRIS now resides in the accumulation account of an SMSF, Miller Super Solutions founder Tim Miller told delegates at the recent Australian Investors Association Conference 2017 on the Gold Coast.

He said a TRIS can now only achieve exempt income status if the trustee receiving it satisfies a condition of release, such as turning 65 or retiring from the workforce, at which time the TRIS is converted into an account-based pension.

Miller pointed out it is this conversion that could create issues in complying with the TBC due to the difference in asset balance limits in fund accumulation phase versus pension phase.

“What’s the limit of how much money you can have in a transition-to-retirement pension? Basically the sky is the limit because it’s in accumulation phase,” he said.

“So we could currently have a transition-to-retirement pension of $3 million and that’s in accumulation, so that pension is going to be earning income and that income is going to be taxed at a maximum of 15 per cent.

“But then we retire and in the old days that $3 million became an account-based pension. Well where now is the trigger for us to do a revaluation to stop that pension and make sure only $1.6 million goes into pension phase and $1.4 million remains in accumulation?

“So we’ve just got to be really careful with transition-to-retirement pensions from now on that at the date when we meet the condition, retirement or turning 65, we need to really take stock of what the TRIS value is at that date and almost start a new pension.”

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