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Retirement, Superannuation

Retirement status critical for TRIS

Correctly assessing whether a client has completely retired is more critical than ever to avoid early release or breaching the transfer balance cap, according to an SMSF lawyer.

Addressing attendees at the SMSF Association National Conference 2019 in Melbourne last week, DBA Lawyers special counsel Bryce Figot said rule changes introduced 18 months ago had altered the tax treatment of SMSF assets where they were being used to pay account-based pensions (ABP) or transition-to-retirement income streams (TRIS).

Figot said retirement has always been a critical event in the SMSF sector as it was condition of release with a nil cashing restriction and turned all benefits into unrestricted non-preserved benefits, as well as allowing in-specie lump sum withdrawals.

To this end, he emphasised assessing when retirement had taken place was more critical following changes introduced on 1 July 2017 as before that date an SMSF’s income was exempt from income tax when its assets were being used to fund an ABP or TRIS.

“Now, however, that income is only tax exempt when assets are being used to pay ABPs or TRISs that are in the retirement phase,” he said.

Additionally, he highlighted that prior to 1 July 2017 “there was basically no limit on how much you could have funding a pension, but now your transfer balance account gets a transfer balance credit when your regular TRIS enters retirement phase”.

“There are some pre-retirement phase TRISs greater than $1.6 million, so the question of when you retire is very important when you notify your trustee because you would hate to get a credit that pushes you over your cap,” he noted.

He warned attendees to check with the ATO if there are any questions around whether a client has retired, claiming he found five case studies that tested the definition of retirement.

“This is a very important area of law. If a mistake is made, a serious contravention can occur with very serious negative implications,” he said.

He pointed out an error could result in the illegal early release of super fund benefits and said it was hard to think of a more serious superannuation crime.

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