Transition to retirement
Restrictions on withdrawals from a TRIS
A TRIS is similar to other account-based pension, with two major exceptions. Until a member has met a condition of release with a nil cashing restriction:
- A member can only withdraw a maximum annual pension amount of 10% of the account balance calculated on the day the pension commenced for the year the pension commenced, or on 1 July for each subsequent year.
- There are restrictions on the circumstances in which the TRIS can be commuted to cash a lump sum that are additional to the circumstances in which any other account-based pension can be commuted.
When the pension account only contains preserved benefits and/or restricted non-preserved benefits, the ability to commute the TRIS to cash a lump sum is limited to the following circumstances:
- to pay a super contributions surcharge liability
- to give effect to a payment split under family law
- to give effect to a release authority for excess contributions or Division 293 tax.
However, if the pension account contains unrestricted non-preserved benefits, the member is able to choose to partially commute the TRIS to cash their unrestricted non-preserved benefits as a lump sum from their TRIS at any time.
From 1 July 2017, individuals will no longer be able to elect to treat superannuation income stream benefits as a lump sum for tax purposes. However, all partial commutations will be taken to be lump sums under the law.
The restrictions discussed above don't prevent a member from choosing to commute a TRIS and retaining the amount in their accumulation account, or commencing a new income stream. However, before a member fully commute a TRIS, they must ensure that a proportion of the minimum annual pension payment amount is paid from the TRIS in that year. That proportion is equal to the number of days in the financial year during which the pension is payable divided by the number of days in the year. However, member's do not need to pay that portion of the minimum annual pension payment amount if either the:
- TRIS has ended on the death of the recipient, or
- sole purpose of the commutation is to pay a super contributions surcharge liability or to give effect to a payment split under family law.
Partial commutation from a TRIS
When a member has unrestricted non-preserved benefits as part of their TRIS, they may partially commute the TRIS and receive a lump sum payment up to the amount of their restricted non-preserved benefits. It is important to note that when a member meets a condition of release with a nil cashing restriction, all of their super benefits are treated as unrestricted non-preserved benefits.
From 1 July 2017, individuals will no longer be able to elect to treat superannuation income streams as a lump sum for tax purposes. However all partial commutations will be taken to be lump sums under the law.
As trustee, when a member partially commutes their TRIS to receive a lump sum payment consisting of unrestricted non-preserved benefits:
- A member must ensure that either
- the account balance of the TRIS immediately after the partial commutation is greater than, or equal to the remaining amount of the minimum annual pension payment amount to be paid for that financial year, or
- a proportion of the minimum annual pension payment amount is paid from the TRIS in the year before the partial commutation. The proportion is equal to the number of days in the financial year before the partial commutation when the pension is payable divided by the number of days in the year.
- the payment does not count towards the maximum annual pension payment limit.
- the taxable and tax-free components of the partial commutation payment must have the same proportions as those determined for the separate interest that supports the TRIS when it commenced.
- the payment can be made by way of an asset transfer, known as an in-specie payment
From 1 July 2017,a partial commutation payment no longer counts towards the member's minimum annual pension payment amount.
Danny turns 56 years old during 2016-17 and retires on 8 October 2016. He immediately starts an account-based income stream that he receives in monthly payments. He decides to take a partial commutation from his income stream in 2016-17.
Before he receives the partial commutation payment, Danny elects to treat his income stream benefit as a super lump sum for tax purposes. He has previously used $25,000 of his low rate cap in 2015-16; therefore $170,000 of this cap is still unused.
On 29 August 2016, he receives the partial commutation of $28,000 from his SMSF. The lump sum has only a taxable component that was taxed in the fund. The fund does not withhold any tax from the payment.
Danny includes the $28,000 as assessable income in his 2016-17 tax return. He receives a super lump sum tax offset - which means that the rate of income tax on the lump sum is nil because the taxable component ($28,000) does not exceed his unused low rate cap.
Danny continues his income stream in 2017-18 and again decides to take a partial commutation payment. The partial commutation now meets the definition of a super lump sum and no election is required. He has previously used $53,000 of his low rate cap; therefore, $142,000 of the cap remains.
On 20 December 2017, he receives the lump sum payment of $25,000 from his SMSF. The lump sum has only a taxable component that was taxed in the fund. The fund does not withhold tax from the payment.
Danny includes the $25,000 as assessable income in his tax return. He receives a super lump sum tax offset - which means that the rate of income tax on the lump sum is nil because the taxable component ($25,000) does not exceed his unused low rate cap.
Danny's commuted amount in 2017-18 does not count towards the minimum annual pension payment requirement for super income streams. To meet this requirement, Danny would also need to make sure he receives sufficient pension payments during the financial year.
Source: GN 2017/14- Removal of election to treat super income streams as lump sums
This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.
Last modified: Wednesday, September 30, 2020