ATO view on reversionary TRISs causing ‘havoc’ for SMSFs

As previously reported, the current view of the ATO in relation to the treatment of reversionary income streams (TRISs) is that a TRIS will always remain a TRIS.

This also means that on the death of the primary pensioner who commenced the TRIS, the reversionary pension also continues as a TRIS regardless of the satisfaction of a further condition of release with a nil cashing restriction [such as] death. However, under the ATO view, a TRIS can only revert to a spouse (or other eligible dependant) if the reversionary beneficiary has satisfied a relevant condition of release such as retirement or attaining age 65.

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Speaking to SMSF Adviser, DBA Lawyers director Daniel Butler said he does not agree with this view, stating that the term TRIS is an adaptive term that depends on the governing rules of the fund at the time; as compared to being a set term.

“This is the silly thing, the ATO says that a TRIS by definition is an account-based pension with two additional restrictions. The ATO however accept that the two additional restrictions for a TRIS drop off once you satisfy a nil cashing condition,” said Mr Butler.

“So the ATO have come to that view that a TRIS is equal to an account-based pension with further restrictions. They accept that the two extra restrictions on an account-based pension fall away when you satisfy a nil cashing condition.”

However, the ATO believe that due to the definition of a TRIS in regulation 6.01 of SISR, if a member with a TRIS satisfies a ‘nil’ cashing restriction and commences to be in retirement phase, the income stream does not cease to be a TRIS, he explained.

The definition of TRIS under regulation 6.01 is a pension provided from a superannuation fund, the rules of which provide for an account-based pension and the two being the ten per cent limit for the annual payment amount and the commutation restriction, he said.

“The ATO say that you’re stuck in reg 6.01, but in my view if the governing rules provide for the TRIS to convert on a nil cashing restriction, then that is all you need to satisfy to convert a TRIS to an ABP,” he said.

SMSFs, he said, would be able to adapt to the legislation, but larger funds, on the other hand, they often treat a TRIS like a financial product.

“That is if you go into a TRIS you’re stuck in a TRIS and then you have to commute your TRIS to get an account-based pension, but in a SMSF, the rules reflect these types of regulations,” he said.

While large funds could also provide the flexibility to auto-convert, he said, often because of their systems, large super funds often treat them as a separate product,” he said.

While some larger funds do have an adaptive definition of TRIS, a lot of the larger retail type products may have a system approach where they take a TRIS and they treat that as one financial product. Thus, if a member wishes to convert a TRIS to an ABP, their systems require the TRIS to be commuted first before an ABP can be commenced. In contrast, for more than 10 years in the SMSF industry, SMSFs have offered auto-conversion based on the adaptive wording in regulation 6.01 provided the SMSF has appropriately worded governing rules.

“The government in trying to appease large funds has really caused a lot of havoc, and a lot of unnecessary costs, uncertainty and complexity,” said Mr Butler.  

“We would really hope that the ATO see the light, and make a sensible call on this to say well it’s been happening out there in practice for a long time, the law certainly supports it, there’s been lots of submissions on this and it will save people a lot of cost and grief.”