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What are the tax advantages of a TRIS?

Section: 13.3

13.3 What are the tax advantages of a TRIS?

Prior to 1 July 2017, a member could make an election to treat TRIS payments as superannuation lump sums for tax purposes. This meant superannuation members had access to the superannuation lump sum low-rate cap for payments from their income stream.

From 1 July 2017, the investments underlying a TRIS are taxed at up to 15% just as they are in accumulation phase.

How the election worked

Prior to 1 July 2017, regulation 995-1.03(b) of the Income Tax Regulations 1997 allowed members to elect to treat one or more payments from their superannuation income stream as a superannuation lump sum for tax purpose. Generally, this option was used to take advantage of tax concessions available when a member was between their perseveration age and 60 years.

If the member made this election, it changed the tax treatment of the payments because they could access the low-rate cap ($215,000 in 2020/21 increasing to $225,000 in 2021/22).  Superannuation lumps up to this cap are tax-free. The cap applies to reduce the amount of tax a member pays on the taxed component of their benefit through a superannuation lump sum tax offset.

From 1 July 2017, the removal of this election meant a member could no longer treat pension payments as lump sums for tax purposes. Instead, they are taxed as income stream benefits. Under the PAYG rules, the fund may need to withhold more tax from their payments.

Example - pre 1 July 2017 compared to post 1 July 2017

Jodi is 57 years old in 2016-17. In addition to her income from employment ($40,000 per year), she commences a TRIS from her self-managed superannuation fund (SMSF) part-way through the financial year. Jodi receives three payments of $12,000. She has received no previous superannuation lump sums and the full $195,000 low-rate cap is available to her.

Jodi receives benefits totalling $36,000 in 2016-17, with tax-free components of $3,600, and taxable components (taxed in the fund) of $32,400.

Jodi elects to treat her TRIS benefits as superannuation lump sums for tax purposes.

In her 2016-17 tax return, Jodi:

  • does not include the tax-free component of $3,600, as it is non-assessable non-exempt income
  • includes the taxable component of $32,400 as assessable income.
  • receives a superannuation lump sum tax offset - which means that the rate of income tax on the lump sums is nil because the taxable component ($32,400) does not exceed her unused low-rate cap.

Jodi continues to receive quarterly TRIS benefits in 2017-18, totalling $48,000. She is no longer able to make the elections to treat the TRIS benefits as superannuation lump sums.

In her 2017-18 tax return, Jodi:

  • does not include the tax-free component of $4,800, as it is non-assessable non-exempt income
  • includes the taxable component of $43,200 as assessable income
  • is taxed at her marginal tax rate
  • receives a tax offset of 15%.

Prior to 1 July 2017, where a member received a TRIS, the fund was eligible for tax-free earnings on the superannuation assets that supported the income stream. From 1 July 2017, the investments underlying a TRIS are taxed at up to 15% just as they are in accumulation phase. Earnings from assets supporting these types of TRIS are taxed at 15% regardless of the date the TRIS commenced.

Source: GN 2017/14- Removal of election to treat superannuation 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: Monday, April 26, 2021