Mistakes with new TRIS rules tripping up practitioners

She reminded practitioners that a TRIS in accumulation phase has no entitlement to claim ECPI; income from TRIS is taxed at 15 per cent in the fund and benefits are still preserved and classified as either restricted non-preserved or unrestricted non-preserved.

Payments from TRISs that are in accumulation are also restricted to 10 per cent, the TRIS does not count towards transfer balance cap and payments cannot be treated as lump sums for tax purposes, Ms Banton added.

TRISs that are in retirement phase on the other hand are entitled to claim ECPI, income is taxed at zero per cent, benefits become unrestricted non-preserved, there are no maximum pension payment restrictions and the TRIS counts towards the transfer balance cap.

Ms Banton said most mistakes arise where a trustee has a TRIS in accumulation phase and they want to start a retirement income stream.

“The kicker is that the member must notify the trustee in writing, stating they have met a condition of release and the TRIS is now a retirement income stream,” said Ms Banton.

“Underestimating the importance of this step would be dangerous. A lack of documentation means that not only could the ECPI claim be disallowed, but the ATO may also apply penalties for not correctly reporting the change in the TRIS as a transfer balance cap event.”

Another significant issue she is seeing is where SMSF practitioners are simply renaming a TRIS to an account-based pension (ABP) in the fund’s financial reports.

“Making this error can be costly as it may render the fund ineligible to claim ECPI and lose the crystallisation of the tax-free and taxable components,” she warned.

There is a legitimate way to change a TRIS in the retirement phase over to an ABP, she said, but it involves a lot of documentation.

“The sequence of events is the TRIS must be firstly commuted back to accumulation phase before a new ABP commences. TRIS roll back documentation must be prepared along with the ABP commencement documentation,” Ms Banton explained.

“These documents should be executed correctly, kept with the statutory records of the fund and provided to the SMSF auditor during the audit.”

It has also been suggested that a TRIS may be able to automatically convert to an account-based pension where the pension documents allows for the TRIS limitations to drop off upon one of the members meeting a condition of release. However, this remains a contentious issue.

Ms Banton said recent changes to super reform and the governing rules have added an extra layer of complication in understanding whether an actuarial certificate is required.

“Whether a fund in the retirement income stream phase requires an actuarial certificate is best left answered by an actuary,” she said.

Some actuarial providers, she said, have developed online tools that work out when a certificate is required and how to use it.

“It’s a whole new TRIS world out there with plenty of trips and traps for even the most seasoned SMSF adviser. Keeping on top of the legislation continues to remain one of the biggest challenges in the industry,” she said.

“Getting it right is critical to ensure compliance with the new rules and it may take some time, and some gentle nudging from your SMSF auditor, to keep on track in this new era.”