Over recent months, a number of advisers have publicly discussed the availability of a strategy for clients aged between 55 and 59 and in receipt of a transition to retirement income stream (TRIS) or with the ability to commence such an income stream. This strategy involves clients satisfying their minimum payment obligations with a payment which is taxed as a lump sum even though they have no unrestricted benefits to take as a partial commutation.
Our firm has now obtained a positive private binding ruling for one of our clients addressing this strategy.
How does the strategy work?
The strategy is best illustrated with the following example:
Carl is aged 58 and works full-time earning $180,000 per annum. He has superannuation benefits of $1 million, all taxable component and all preserved.
Carl has not previously commenced to draw a pension from his fund because the tax payable on a pension payment of at least the minimum amount would outweigh the tax savings in the fund and he has no unrestricted benefits with which to utilise a partial commutation strategy.
Based on this new approach, Carl could commence to draw a TRIS from his fund, request the trustee make a payment to him of up to $100,000 and at the same time elect that the payment not be treated as an income stream benefit. Carl would simply be asking for a payment and not requesting a partial commutation from his pension.
Such a payment would be permitted under the superannuation legislation and tax free up to Carl’s low rate cap with the fund still receiving all of the benefits of being in pension phase.
For clients wishing to employ such a strategy, the following steps are essential:
1. If not already in pension phase, document the commencement of a TRIS with the client’s accumulation benefits (or part thereof).
2. Identify the minimum and maximum payment limits for the TRIS in the current financial year.
3. Have the client:
• Make a written request to the trustee to take a payment from the fund of an amount of at least the minimum, and no more than the maximum, taking into account any payments made since 1 July 2015, and
• Make a written election for the payment to not be treated as a superannuation income stream benefit as per Income Tax Assessment Regulation 995-1.03(b).
4. Have the fund make payment to the client of the amount specified in step 3.
For whom is the strategy applicable?
The strategy is applicable for clients who are:
• Between their preservation age and age 59;
• Currently receiving a TRIS or could commence one; and
• Whose benefits in the TRIS are all preserved (as is usually the case with individuals drawing a TRIS).
This strategy is also available to retirees drawing account-based pensions and working individuals drawing a TRIS who have had a termination of employment in the past which has triggered an unrestricted benefit. However, such a strategy is not necessary for these clients as they have unrestricted benefits and can therefore employ the ‘old school’ strategy of taking a lump sum commutation from their pension account which also counts towards their minimum payment limit.
Criteria which must be satisfied
Clients/advisers must be mindful of the following:
• The amount paid under such a strategy will count towards the client’s minimum and maximum payment limits. This means the amount paid, together with any other payments since 1 July 2015 (including amounts taxed as pension payments), must not exceed the client’s 10 per cent maximum payment limit for the year.
• In the ATO’s view, the payment must be taken in cash (i.e. the strategy may not be used with an in-specie payment). Whilst we do not believe this is technically correct, we recommend you follow the ATO’s guidance in this instance.
• The written election in step 3 above must be made before the payment.
• As the client is electing for the payment to not be treated as a superannuation income stream benefit for tax purposes, it will be taxed as a lump sum. This means it will count towards the client’s low rate cap ($195,000 in the current year) which is a lifetime limit.
Amounts within the low rate cap are included in the client’s assessable income but are effectively tax-free via a tax offset. Amounts in excess of the low rate cap are also included in the client’s assessable income but subject to a maximum tax rate of 17 per cent via a tax offset.
Thus the optimal strategy for each individual client will be determined by their own circumstances.
• It is important to recognise that the client should not be requesting the partial commutation of their pension. A partial commutation is not permitted as the client does not have unrestricted benefits. They are simply requesting a payment and then electing for that payment to not be treated as a superannuation income stream benefit.
It is critical that the documents to give effect to this strategy are appropriately drafted.
We recommend you prepare such documents for each payment made under such a strategy.
Where you wish to employ such a strategy for a client, we recommend you take a ‘sooner rather than later’ approach as there is potential for the government to stop the strategy with a simple change to the tax regulations. You will also note the media is speculating that the government may seek to ban new TRISs as part of the Tax White Paper.
Stuart Forsyth, director, McPherson Super Consulting