Lawyer pinpoints estate planning concerns with TRISs
Draft guidance from the ATO has cast doubt over whether a TRIS that is in retirement phase will remain in retirement phase if it automatically reverts to a beneficiary that has not met a condition of release, warns an industry lawyer.
DBA Lawyers senior associate David Oon explained that Treasury made amendments to enable a TRIS to enter retirement phase once they have satisfied a condition of release with a nil cashing restriction, so that they don’t have to stop their TRIS to get the pension exemption.
“This will happen automatically when the member reaches age 65, it will also happen when the member notifies their trustee that they have satisfied a relevant condition of release with a nil cashing restriction, other than turning age 65. The superannuation income stream becomes eligible for the earnings tax exemption at the time it is notified,” said Mr Oon.
Mr Oon said the ATO have stated in their frequently asked questions webpage that the “law does not facilitate an auto-conversion of a TRIS to a different or new pension or income stream” and that the “same TRIS continues on and remains a TRIS until such a time as it ceases,” the ATO website said.
“Now that’s a bit hard to swallow. I think the law opens it up to a TRIS being converted to an account based pension via documents, [however]. I don’t think the ATO could really point to anything that says that can’t happen, but we are seeking to clarify this position,” said Mr Oon.
If the ATO does not agree that a TRIS can be converted to an account based pension via documents, however, this could have significant consequences for estate planning, where a pension automatically reverts to a spouse or beneficiary, he warned.
“Consider this, George has a TRIS, he turns 60 and retires and his TRIS enters retirement phase. He then dies and his TRIS then automatically reverts to his wife Leonie who is 53 and hasn’t met any conditions of release. So is Leonie’s inherited TRIS in the retirement phase?” he said.
Previously this is something practitioners would not have had to consider, he said, as the TRIS would have become an account based pension upon the death of a member, and so Leonie would have inherited an account based pension.
“You would think that because George met a condition of release with a nil cashing restriction which is death that Leonie’s TRIS is in the retirement phase. [However], when you open up the new laws and how they’ve been written, it doesn’t really get you there so cleanly,” he said.
The main problem Mr Oon said is that section 307-80 of the 1997 Income Tax Assessment Act was changed in June to explain when a TRIS enters retirement phase, and it broadly says that a pension is not in retirement phase if its TRIS and the person to whom it is payable has not met any conditions of release.
“So it seems to be very heavily focused on the person to whom the TRIS is payable. When you look at the broader section, it doesn’t actually go on and explain in the case of death what the relevance of the condition of release of death that was met by the person who died,” he said.
“The focus of the law seems to be on who the TRIS is being paid to at the time.”
George had met a condition of release with a nil cashing condition, explained Mr Oon, so he was fine to have his TRIS in the retirement phase but Leonie hasn’t met any of those conditions of release.
“So how does the trustee get the pension exemption given it’s now paying a TRIS to someone that hasn’t met a condition of release with a nil cashing restriction?” he said.
“Will the trustee have to fully commute the TRIS and start a brand new account based pension for Leonie that’s clearly in retirement phase? Yes, draft ATO guidance suggests that needs to happen. Now that seems crazy because what definitely did happen from a super point of view, is that the death (or even attaining age 65 even prior to death) caused any preserved benefit to become unrestricted non-preserved benefits and you can cash unrestricted non-preserved benefits in the form of an account-based pension.”
Converting the TRIS to account-based pension via documents before the death of the member, if allowed, could be a solution to the issue, he said, but will need to be confirmed by the ATO.