ATO ruling ‘bad news’ for TRIS lump sum strategies

Since the ATO released a fact sheet about the transition to retirement pension payments in January 2016, Mr Butler said there has been uncertainty around whether the payment of lump sums would impact ECPI.

In the fact sheet the ATO said that “electing for a TRIS payment to be treated as a super lump sum for income tax purposes may affect the amount of the SMSF’s exempt current pension income for an income year and whether particular fund assets are segregated current pension assets”. 

The ATO has now issued numerous PBRs including a very recent one which confirms the ATO’s view on this, he said.

In this particular example, the most recent PBR stated that if a trustee does elect for a payment to be treated as a lump sum it will impact their pension exemption, Mr Butler explained.

This principle is not only relevant in respect to a TRIS but also to account-based pensions where a member under 60 years elects to have an amount treated as a lump sum rather than a pension, he said.

In its PBR, the ATO said if a member makes or has made an election under regulation 995-1.03 of the Income Tax Assessment Regulations 1997 (Cth) to have a payment from an account-based pension not be treated as a superannuation income stream benefit, the fund can claim ECPI in respect of the pension under section 295-390 of the ITAA 1997.

“However, the average value of the fund's current pension liabilities in respect of the pension for the purposes of applying the formula in subsection 295-390(3) of the ITAA 1997 will be reduced reflecting the value of the superannuation lump sum that results from making the election,” the ATO said in its statement.

Mr Butler said following this PBR, SMSF practitioners that have been adopting this lump sum strategy with TRIS payments will need to watch out. Broadly, it means the election will only work with the unsegregated method of claiming a pension exemption with a reduced exempt proportion. However, the ATO have confirmed the ECPI does not work in respect of segregated pension assets.

“The PBR makes it clear that the ATO will adjust your pension exemption by virtue of opting to adopt this TRIS strategy. A lot of people have been doing this, and now they have to work out whether they need to go back and adjust the tax returns from the past,” he said.

“This has confirmed the bad news, a lot of people were hoping was not going to be a problem, but the ATO is saying yes it is a problem, and it’s not only a problem for TRISs, it’s a problem for account-based pensions as well.”

Where a fund has been relying on the segregated method, Butler says its arguable that the exemption is only reduced to the extent a lump sum is claimed as a share of the overall pension assets rather than entirely as indicated by the ATO.