About transition to retirement income streams
A transition to retirement income stream (TRIS) allows members who have reached their preservation age of 60 years of age to access their superannuation benefits without having to retire or leave their job. The preservation age of 60 years is the minimum age a member can access their preserved super benefits without meeting another condition of release.
A TRIS is an account-based pension. Lump sum payments can only be made in limited circumstances.
It's not compulsory for your SMSF to offer members a TRIS, although your SMSF may pay a TRIS if the fund's trust deed allows this.
The start of a TRIS won't count as a credit to the member's transfer balance account.
Before starting to pay any pension, we recommend you seek the advice of a professional such as an accountant, financial planner or actuary.
TRIS requirements
A TRIS must be an account-based pension and meet the following requirements:
- There must be a payment from the pension at least once each year.
- An account balance must be attributable to the recipient of the pension.
- Each year, you must pay the minimum payment amount to the member.
- The capital value of the pension and the income from it cannot be used as a security for a borrowing.
- The pension can only be transferred to another person on the death of the recipient.
Until the recipient meets a condition of release with no cashing restrictions:
- The total payments made in a year must not exceed 10% of the account balance on the start date of a TRIS
- for the year it starts, or
- on 1 July for each subsequent year.
- The restrictions on the commutation of the pension must be met.
If you don't meet these requirements when paying a TRIS in an income year, both of the following apply:
- As trustee, you are deemed not to have paid an income stream at any time during the year.
- The TRIS (super income stream) ends for income tax purposes.
An amount rolled over to another super fund or retained in the fund is not counted when working out if the minimum annual pension amount has been paid in a particular year. However, you do count a payment split under family law.
When paying a TRIS, you are required to treat the amount supporting the income stream as a separate interest in line with income tax laws. This means on the start day of the TRIS, you must determine the amount of the tax-free and taxable components of the separate interest.
Members can't choose which tax components they wish to start the TRIS with. The tax components of the separate interest will be in the same proportions as the tax components of the member's non-pension interest from which the amount was sourced to start the TRIS just before starting the TRIS.
Record keeping
If you're paying a TRIS, you must keep appropriate records that show:
- the value of the TRIS
- when it starts
- when it enters retirement phase
- on 1 July each year
- any benefit payments made (including whether they are made as pension payments or lump sum payments)
- how the payments are made (which includes adjusting the preservation classes of the member’s benefits where applicable)
- a recording of the date the TRIS entered into the retirement phase
- the share of the fund's earnings allocated to the TRIS.
The earnings allocated to the TRIS must be added to the member's preserved benefits.
It's very common for contributions to be made for a member while they are being paid a TRIS. A contribution received after a pension has started can't be added to the capital supporting the pension. So, you, as trustee, will be required to account for the contributions, and any rollovers, received for the member in a way that keeps them separate from the account balance of the TRIS.
If a member wants to combine accumulation money (including a contribution) with their existing TRIS, they must:
- choose to fully commute the original TRIS
- apply for a new pension using the increased balance.
Starting a TRIS
When a member asks to start a TRIS, first establish the amount of benefits they have in the SMSF. Use the valuation guidelines to help you establish:
- the value of all the fund's assets and liabilities
- each member's share of the net value of the fund.
You should also determine the amount of each preservation class of benefits the member has in the SMSF. A member may have a mix of unrestricted non-preserved benefits, restricted non-preserved benefits and preserved benefits.
If the member chooses to start a TRIS using an amount less than their total super benefits in the SMSF, you can (but don't have to), allocate the preservation classes of the member's benefits to the TRIS.
TRIS moving into retirement phase
A TRIS will move into the retirement phase when the member meets one of the following conditions of release:
- age 65
- retirement
- permanent incapacity
- terminal medical condition.
A TRIS automatically moves into the retirement phase:
- as soon as the member reaches age 65, or
- if the super income stream starts to be paid to a reversionary beneficiary after the member's death.
For the other conditions of release listed above, the member needs to notify the SMSF for the TRIS to move into the retirement phase. In these cases, the TRIS will move into the retirement phase at the time SMSF is notified.
Meeting a condition of release with no cashing restrictions means the pension is no longer subject to the restrictions generally characteristic of a TRIS. However, the pension does not end; it continues and all benefits become unrestricted non-preserved benefits.
Subject to the rules of the pension:
- The maximum annual pension payment limit no longer applies.
- The commutation restrictions specific to a TRIS will end.
It also means that the TRIS meets the definition of a retirement phase income stream. Entering the retirement phase has the following consequences for a TRIS:
- The value of the pension at that date is counted towards the member's transfer balance cap, as a transfer balance credit.
- Some or all of the fund's income and capital gains may be treated as exempt current pension income and exempt from tax from the date the TRIS moves into the retirement phase.
Payments of TRIS benefits
Priority of cashing benefits
As each TRIS payment is made, you must adjust the fund's record of the member's preservation classes allocated to the TRIS. If the member has a combination of any preserved, restricted non-preserved or unrestricted non-preserved benefits allocated to the TRIS, the payments from the TRIS must be deducted from the preservation classes in the following order:
- unrestricted non-preserved benefits
- restricted non-preserved benefits
- any preserved benefits.
This means, until the member has met a condition of release with no cashing restrictions, their unrestricted non-preserved benefits allocated to the TRIS (which would otherwise be fully accessible as a lump sum super benefit) are reduced by the annual pension payments from the TRIS.
Before you pay a lump sum benefit from a TRIS to a member, you need to check whether the member has met a condition of release with no cashing restrictions. If not, check if there are enough unrestricted non-preserved benefits to pay the lump sum. This ensures no breach of the pension standards.
If the member has met a condition of release with no cashing restrictions (that is, without a restriction on the amount of benefit that can be paid or how it can be paid), usually you don't need to adjust the fund's record of the member's preservation classes. With a no cashing restrictions condition of release, all the member's benefits generally become unrestricted non-preserved benefits. However, most TRISs when they start are subject to cashing restrictions.
Tax implications when paying a TRIS
When the fund is liable to pay a super income stream such as a TRIS to a member of the fund in a particular income year, some or all of the fund's income and capital gains may be treated as exempt current pension income (ECPI) and exempt from tax.
Whether you are eligible to treat some of the fund's income from the assets supporting the payment of a TRIS as ECPI income will depend on if the TRIS is in the retirement phase.
Earnings from assets supporting a TRIS that is not in the retirement phase will be taxed at 15%.
If you're paying super benefits from a TRIS to a member who is over 60 years of age, there is no need to withhold tax as the pension payments will generally be received tax-free. The member won't generally have to declare their TRIS income in their tax return.
If you are paying super income stream benefits to a member who is under the age of 60, the taxable and tax-free components determined at the start of the TRIS will determine how much:
- of each benefit is assessable income
- tax you must withhold.
The member:
- is generally entitled to a tax offset of 15% of the taxable component of benefits received in the year
- must declare the taxable component of such benefits received in the year in their tax return.
As trustee, you must confirm whether a member under age 60 wishes to claim the tax-free threshold to ensure the correct amount of tax is withheld.
Restrictions on commutations from a TRIS
There are restrictions when the TRIS can be commuted to cash a lump sum in addition 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, you can commute the TRIS to cash a lump sum only in the following circumstances:
- paying a super contributions surcharge liability
- to make a payment split under family law
- to action a release authority for excess contributions or Division 293 tax.
However, if the pension account contains unrestricted non-preserved benefits, the member can choose to partially commute the TRIS to cash their unrestricted non-preserved benefits as a lump sum from their TRIS at any time.
The restrictions above don't stop a member from either:
- choosing to commute a TRIS and retaining the amount in their accumulation account
- starting a new income stream.
Before you fully commute a TRIS, you must ensure that a proportion of the minimum annual pension payment amount is paid from the TRIS in that year. The proportional amount 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.
You do not need to pay the proportional amount if either the:
- TRIS has ended on the death of the recipient
- sole purpose of the commutation is to
- pay a super contributions surcharge liability, or
- make a payment split under family law.
Partial commutation from a TRIS
Restrictions on withdrawals from a TRIS don't stop you from paying a member all or part of their unrestricted non-preserved benefits.
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 unrestricted non-preserved benefits. Importantly, when a member meets a condition of release with no cashing restrictions, all of their super benefits are treated as unrestricted non-preserved benefits.
As trustee, when a member partially commutes their TRIS to receive a lump sum payment consisting of unrestricted non-preserved benefits:
- you 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
- a proportion of the minimum annual pension payment amount is paid from the TRIS in the year before the partial commutation
- 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 started
- 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.
Calculating the maximum annual pension payment limit
When working out whether you have stayed below the maximum annual pension payment limit, you ignore any payments you made as a result of any commutation of the TRIS.
When calculating the maximum annual pension payment limit for a TRIS:
- don't reduce the maximum annual pension payment limit for a financial year if the TRIS started in that year on a day after 1 July
- the 10% rate does not vary with the member's age
- don't round the maximum annual pension payment amount to the nearest $10.
Exceeding the maximum annual pension payment limit
If a member has only restricted non-preserved benefits or preserved benefits as part of their TRIS, exceeding the maximum annual pension payment limit will be a breach of super laws. This is because the fund has not met the cashing restrictions that apply to a TRIS.
If the maximum annual pension payment limit is exceeded for a year in these circumstances:
- we may make your fund non-complying and penalise you as trustee
- the TRIS ends for income tax purposes at the start of that income year
- the member's account balance is no longer seen as supporting a TRIS and any payments made during the year (not just the amount in excess of the limit) will be
- super lump sums for income tax purposes
- lump sums for SIS Regulations purposes
- the lump sum payments are included in the member’s assessable income and are taxed at marginal rates, without any tax offsets.
The payments are treated as early access to the member's super benefits and a breach of the SIS payment standards.
Full commutation of a TRIS
A TRIS ends when a member's request to fully commute their TRIS to a lump sum occurs.
Subject to the preservation status of the benefits, the SMSF's trust deed and the rules of the TRIS, a member can fully commute the TRIS and:
- leave the funds that were supporting the TRIS in the SMSF or roll them over to another complying super fund
- receive a lump sum super benefit if either the
- member has met a condition of release with no cashing restrictions
- amount of the lump sum does not exceed their unrestricted non-preserved benefits.
A member who hasn't met a condition of release with no cashing restrictions and has restricted non-preserved benefits or preserved benefits can only fully commute their TRIS and either:
- retain the amount of the commutation lump sum to accumulate within the super system
- start another non-commutable income stream or TRIS from the SMSF or from another complying super fund.
When the commutation lump sum is returned to accumulation in the SMSF, the tax-free and taxable components will need to be recalculated whenever a new benefit is paid from the fund.
When a member receiving a TRIS dies
A TRIS ends as soon as the member in receipt of the pension dies. This is unless a dependant beneficiary is automatically entitled under the SMSF's trust deed or the rules of the pension to receive the pension upon the member's death. For example, the member's spouse may be paid the member’s benefits in the form of a pension. This is known as a reversionary pension or reversionary income stream. For a TRIS that is a reversionary pension:
- The tax-free and taxable components of the pension will continue to be in the same proportions as determined when the TRIS started.
- The balance will count towards the beneficiary's transfer balance cap.
- The pension will no longer be non-commutable or subject to the maximum annual pension payment limit.
As trustee, you must ensure that the minimum annual pension payments continue to be made. In the year the member dies, the minimum annual pension payment amount is based on the member's age. In subsequent years, it is based on the age of the dependant beneficiary who became automatically entitled to receive the pension upon the member's death.
When a TRIS is not a reversionary pension, the TRIS ends as soon as the member in receipt of the pension dies. In this case, the trustee does not need to make the minimum annual pension payment unless required to do so by either the:
- SMSF trust deed
- rules of the pension.