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You’ll need a PBR for a TRIS to be tax-free

By Bryce Figot
12 January 2016 — 5 minute read

A TRIS strategy involving payments being taxed as a lump sum has gained a lot of interest following a private binding ruling by the ATO. However, advisers need to take caution and seek private binding rulings first.

The strategy is as follows:

Step 1 — A person aged between preservation age and 60 receives a transition to retirement income stream (TRIS). The TRIS is funded entirely or largely by the taxable component and preserved benefits.

Step 2 — The person makes an election under reg 995-1.03 of the Income Tax Assessment Regulations 1997 before receiving a TRIS payment.

Step 3 — The TRIS payment is taxed in the person’s hands as a lump sum and tax-free under the low rate cap amount. Naturally, without step 2, the TRIS probably would have attracted income tax.

Step 4 — The TRIS payment still counts towards the TRIS minimum requirements.

Step 5 — The fund claims the pension exemption in respect of the TRIS assets.

The ATO has issued a private binding ruling suggesting that step 3 is allowable. However, I believe that there’s still some risk associated with step 3 as well as steps 4 and 5. Here’s why.

Risk 1 — Is the fund actually eligible for the pension exemption (step 4)?

Under the ‘Relevant facts and circumstances’ section of the private ruling the following is stated: ‘The self-managed superannuation fund is claiming exempt current pension income under section 295-390 of the ITAA 1997 (unsegregated method).’

However, the ATO does not confirm that the fund actually is eligible for the exemption.

Further, I’m familiar with certain ATO correspondence from December 2015 (not the private ruling) on this very topic where the ATO cautions ‘If a fund pays a superannuation lump sum as a result of an election under regulation 995-1.03 of the ITAR, there may be implications as to the fund's ability to claim ECPI.’

This is why I think a private binding ruling for the fund as well as the person is desirable.

Risk 2 — Do the payments actually count towards the TRIS minimums (step 5)?

The simple answer is yes: naturally, the relevant payments are simply payments from a pension account that are not lump sums resulting from commutation. The answer should stop there. And legally I think that it does. However, the following causes me consternation.

The explanatory statement that accompanied the introduction of reg 995-1.03 expressly answered this question in the negative. More specifically (Explanatory Statement, Income Tax Assessment Amendment Regulations 2007 (No. 2) (Cth), 8):

The definition of a ‘superannuation income stream benefit’ is inserted by item 3 as new regulation 995-1.03. A ‘superannuation income stream benefit’ is any payment from an interest supporting a superannuation income stream unless the taxpayer elects, before a particular payment is made, that the amount is not a superannuation income stream benefit. Such an election can only be made if the superannuation income stream product allows for variation in the size of the payments of a benefit in a year. This provides more flexibility for taxpayers to determine what amounts they need in a particular year. An amount which a person elects to take as a lump sum does not count against the minimum draw down requirements.

Naturally explanatory statements do not form law per se.

Some people have mentioned SMSF determinations SMSFD 2013/2 and SMSFD 2014/1. However, neither of those would have any application because they are in the context of partially commuted amounts that are cashed out of the super system counting towards the prescribed minimums. In the present case, there are entirely preserved benefits and so there is no scope to cash any commuted amounts out of the super system.

(I note that, technically, this is not an income tax issue and so rather than being the subject of a private binding ruling, it is probably better placed as the subject of ATO SMSF-specific advice.)

Risk 3 — Has the ATO actually approved this?

Remember that the ATO has publicly stated that this strategy does not work. More specifically, the minutes of the November 2009 NTLG Superannuation Technical Sub-group record the following:

Can a member with a transition to retirement account-based pension, where the entire balance of the pension is preserved money, make an election under ITAR 995-1.03 such that a payment from the pension is taxed as a superannuation lump sum rather than a superannuation income stream benefit?

Can this payment be counted towards meeting the minimum pension amount required for the year?

That is, a commutation is necessary in order for an election to be made under paragraph (b) of regulation 995-1.03 of the Income Tax Assessment Regulations 1997. Where no commutation is possible under the rules of the pension, no election will be able to be made for the purposes of regulation 995-1.03.

Naturally, these comments were over six years ago. Further, NTLG minutes are not binding.

Although it is hoped that the private ruling referred to previously overrides the above when it comes to ATO internal policy, there is no guarantee that it has. A private binding ruling only binds the ATO for that one specific taxpayer.

There have been a number of well known instances in recent times where the ATO has issued positive private binding rulings to some taxpayers but then later stated that a more negative situation applies to everyone else, namely:

- Nil interest related party limited recourse borrowing arrangements — private binding ruling 1012414213139 involved a nil interest related party limited recourse borrowing arrangement and the ATO said that that did not give rise to non-arm’s length income. Naturally, these days no one would rely on that.

- Dividend stripping and private companies — private binding ruling 1011752438160 involved shares in a private company being contributed to an SMSF and the company paying the retained earners out to the SMSF. The ATO said that that would not give rise to dividend stripping. Naturally, these days no one would rely on that, especially in light of taxpayer alert TA 2015/1.

Risk 3 — The overall context

To me, the overall context is that there is a touch of ‘too good to be true’ about this strategy. I’m on guard whenever taxpayer wants do something that does not change the economic substance of an arrangement except altering the amount of tax payable.

This segues into the first reason why I think private rulings are necessary: to address the risk of part IVA for taxpayers (and promoter penalties for advisers).

For technical reasons to do with the definition of tax benefit in s 177C of the Income Tax Assessment Act 1936, I would hope that part IVA would not be enlivened by this strategy. However, to date, I don’t believe that the ATO has commented on part IVA and this strategy.

I acknowledge that waiting for a private binding ruling can be slower than taxpayers would like, and asking whether part IVA is enlivened can prolong the process further.


I’m not trying to be negative on this one. However, there are risks and uncertainties that practitioners should not gloss over.

I think that — unless and until the ATO provides further public comments — anyone wanting to adopt the strategy set out above should seek private binding rulings for both the individual and the fund. Failure to do so might expose the individual, the fund and their advisers to the possibility of the risks set out above and possibly more too.

Bryce Figot, director, DBA Lawyers


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