The proposed amendments to the 2016 Budget measures for the treatment of transition to retirement income streams and limited recourse borrowing arrangements were passed on 15 June 2017 – Treasury Laws Amendment (Fair & Sustainable Superannuation) Bill 2016.
These amendments change how the 2016 Budget measures affect those with a TRIS or about to enter into an LRBA.
Transition to retirement income streams
The 2016 Budget measures will have a dramatic impact on TRISs from 1 July 2017 as a TRIS will no longer be eligible for the tax exemption (exempt current pension income) on the earnings supporting a TRIS.
Under the 2016 budget changes as originally passed, if a pension started as a TRIS, the ECPI exemption could never apply, even where the pensioner subsequently satisfied a condition of release with no cashing restrictions.
These amendments address this issue. Income from assets that support a pension that started as a TRIS will be eligible for the ECPI exemption after 1 July 2017 if the member has turned 65 or has satisfied the retirement, terminal illness or permanent incapacity conditions of release.
However, there are some traps.
- If a member satisfies the retirement, terminal illness or permanent incapacity condition of release, the ECPI exemption only applies if the member has notified the SMSF. (It does not happen automatically, as it does when a member turns 65.
. This means that the pensioner must provide the SMSF with the appropriate supporting documentation to confirm these conditions of release have been satisfied.
- The legislation does not remove the limitations (maximum pension payment and commutation restrictions) in the pension documents that apply to a TRIS. If the pension documents or trust deed are not specifically drafted to remove the TRIS restrictions, they will continue to apply even after the pensioner has satisfied a condition of release with no cashing restrictions. This means if a pensioner draws more than 10% of their opening balance as pension payments or commutes to a lump sum, the SMSF will be in breach of the payment standards. . If the pension documents or trust deed do not provide that the restrictions automatically cease to apply, further steps (such as stopping and restarting the pension) may be required to remove the TRIS restrictions in the pension. Most paperwork we see to ‘convert’ a TRIS to an account based pension (or remove the TRIS restrictions) is not sufficient.
All TRIS pension documents should be immediately reviewed to ensure the TRIS restrictions cease to apply automatically.