Starting a Transition to Retirement Income Stream (“TRIS”)

Below are someuseful facts about commencing a Transition to Retirement Income Stream (“TRIS”).

Tax implications of an asset sale by the SMSF
If a SMSF is in accumulation phase in contrast to being in pension phase,the fund sold an asset, and the sale of the asset took place prior to converting the fund to pension phase the profit on the sale of the asset would be subject to tax on capital account and the SMSF would be entitled to receive the 33.33% capital gains tax discount for which SMSFs are eligible. This would make the effective tax rate on the capital profit of the sale of the asset 10% instead of the normal 15%. The proceeds from the sale would then need to be retained by the fund until such time as the fund was converted to pension phase, being either a normal allocated pension or a TRIS.

Converting a SMSF from accumulation phase to pension phase
Converting the fund to pension phase is not a big deal. First the member or members would need to reach their vesting age. Please refer to the table below for vesting ages.

Year of birth Vesting Age
1960 and prior 55 years
1961 56 years
1962 57 years
1963 58 years
1964 59 years
1965 and later 60 years

 

Once the fund is in pension phase it is free from any tax on either the income or capital gains that it derives. In addition the following are the implications of converting the fund to pension phase assuming a members vesting age is 55years.

Commencing a TRIS between the ages of 55 and 60

A TRIS could be commenced without having the need to for the member to formally retire from the work force. In fact this is the whole reason that TRISs were introduced. It enables people approaching retirement to transition to retirement by being able to remain in the workforce and not have the need to retire. Taking a TRIS between the ages of 55 to 60 means the following:

  • That the income and capital gains derived by the fund are free from tax
  • The maximum pension that the member can take from the fund is capped at 10% of the members fund balance
  • The member must take an annual  minimum pension of their fund balance. The minimum pension amount is set out in the table below.
  • The pension amount received by the member would be taxable at the member’s marginal tax rate less a 15% rebate.
  • The member can remain in the workforce and can continue to make annual superannuation contributions to the fund up until the maximum contribution caps.

Minimum annual payments for super income streams

The link below will list the minimum annual pension payments that the member of a SMSF must take from the fund once a pension income stream is commenced.

http://www.ato.gov.au/super/content.aspx?menuid=0&doc=/content/60489.htm&page=9&H9

Commencing a TRIS after turning 60 years of age

If a TRIS was taken by a member after turning 60, all of the above would still be applicable. The only exception would be that  the member would not be subject to income tax on the pension amount received by him from the fund.  Therefore the full tax free benefits do not occur until the member turns 60.

Formal retirement
To eliminate the 10% cap on the maximum pension amount, should a member  want to take all of the funds out of the SMSF,  the member would need to formally retire and take a normal allocated pension.

If  the member formally retired prior to age 60 and took a normal allocated pension from the fund instead of a TRIS the same tax rules as above would apply. That is the pension would still be taxable in the hands of the member at their  normal marginal tax rate less a 15% rebate, and the pension received by the member would not become tax free until after the member turned age 60. The only added benefit of a formal retirement versus taking a TRIS is that it lifts the 10% cap on the maximum pension amount should a member want to take more than 10% of their fund balance.

Objective is to maintain benefits in the SMSF environment
Given that the SMSF would be free to invest in either an unrelated geared entity or a directly geared property investment  and given that under the current superannuation regime that there are limits on how much you can put into the fund  and no limit on how much you can take out, the objective would have to be to seek to preserve for as long as one can as much as possible in the fund because of the concessional tax treatment on the earnings of the fund once it is in pension phase.

 

Services
Services

We specialise in providing tax, accounting, and strategic advice to business owners, high net worth individuals and their families.

Learn about BPC Accounting Services
Contact Us

Phone us on (03) 8602 6100 or contact us via our online enquiry forms.

Send an email enquiry