The Government’s 1 July 2017 tax changes caused Transition to Retirement Income Streams (TRIS) to fall out of favour with many advisers and their clients. But, depending on the client’s circumstances, they can still be a valuable tool.
If the fund is not entitled to a tax exemption on the earnings of a TRIS balance, why not simply leave the monies in accumulation phase?
Many individuals did in fact stop their TRIS and roll their benefits back to accumulation phase effective 30 June 2017 given the 1 July 2017 loss of the tax exemption. However, for some individuals, there can still be benefits to maintaining/commencing a TRIS including:
- Most people under age 65 who have not yet met a retirement definition are unable to access their super. However, if they have at least reached their preservation age, they can commence a TRIS and draw up to the 10% maximum pension limit each year. For those at least age 60, the pension payments will be tax free. For individuals with cash flow difficulties, commencing/maintaining a TRIS can be a valuable option.
The cashflow generated from the TRIS pension payments can even be used to make deductible contributions to superannuation (assuming all the relevant criteria/caps are met).
- Where large tax free contributions are to be made to superannuation (eg CGT cap contributions, non-concessional contributions using the bring forward rule), it may be appropriate to isolate the contribution into a pension account to maintain its status as a 100% tax free proportion pension. For those not yet 65/retired but at least preservation age, a TRIS is the only type of pension account available to them.
Isolating the tax free contribution this way may have advantages for those not yet age 60 or on the death of the individual, and can act as a hedge against future changes in the law.
Note, this strategy is only possible where the contribution hasn’t been added to an accumulation account containing taxable components before the TRIS is commenced.
But isn’t the balance of a TRIS limited to $1.6m?
No. The balance of a TRIS is not counted towards the $1.6m Transfer Balance Cap (and no TBAR is lodged) until the TRIS becomes a retirement phase pension. This will generally be when the individual reaches age 65 or notifies the trustee of their retirement. Until this time, the balance of the TRIS is unlimited.
Conceptually it makes sense for the Government not to limit the amount in a TRIS until age 65/retirement because the fund is not receiving a tax exemption on the earnings on the TRIS balance until that time.
Depending on the client’s needs, commencing/maintaining a TRIS of more than $1.6m may be appropriate. The important thing will be making sure the balance is reduced to no more than the Transfer Balance Cap just before the TRIS becomes a retirement phase pension (eg at age 65, notification of retirement).