Treasury Laws Amendment (2018 Measures No.4) Bill 2018 finally received Royal Assent on 1 March 2019. This Bill addressed an outstanding issue with reversionary transition to retirement income streams (TRIS) paid to a beneficiary who had not yet met a condition of release.
The issue with reversionary TRIS
From 1 July 2017, the concept of a TRIS being in retirement phase (or non-retirement phase) was introduced. A TRIS is in non-retirement phase where the member is under the age of 65 and has not met a nil cashing restriction condition of release. A TRIS moves to be in retirement phase when the member attains age 65 or once the member satisfies a condition of release and reports that to the fund Trustee.
From 1 July 2017 the rules for cashing death benefits, under Superannuation Industry (Supervision) Regulations 1994 - Reg 6.21, were also updated to identify that a death benefit income stream must be in the retirement phase. This created an unintended consequence for automatically reversionary TRIS’ in that an automatically reversionary TRIS paid to a beneficiary who had not yet attained age 65 or reported to the trustee they had met a condition of release would not be in retirement phase. As the income stream was not in retirement phase it would not meet the cashing requirements. The beneficiary would need to commute the income stream and take the benefit as a new death benefit income stream which would be an account-based pension in retirement phase.
This was inconsistent with the treatment of other reversionary income streams and was not the intended outcome of the law.
Fixing the problem
Treasury Laws Amendment (2018 Measures No.4) Bill 2018 implemented a fix to this issue, which will allow a reversionary TRIS to be paid to a beneficiary who has not themselves met a condition of release.
Income Tax Assessment Act 1997 will be updated to insert after Sect 307.80 (3)(a) the following:
(aa) the person to whom the benefit is payable is not a reversionary beneficiary;
This will mean that a TRIS would be in retirement phase if it is payable to a reversionary beneficiary. This update will apply retrospectively from 1 July 2017 ensuring that all beneficiaries of a reversionary TRIS can continue to receive their reversionary income stream from 1 July 2017. However, this may come too late for those who previously complied with the legislation and as such ceased their TRIS instead of continuing to pay it as a reversionary pension.
John and Jane are aged 59 and 55 respectively and have their superannuation savings in a self-managed superannuation fund (SMSF). John has previously notified the fund that he had satisfied a condition of release. John is currently in receipt of a TRIS while Jane’s balance is in accumulation phase. On 1 August 2018, John passed away with the terms of his TRIS stating that it is automatically reversionary to Jane.
Prior to this law change, as Jane had not yet met a condition of release she would not have been able to accept the reversionary TRIS and instead could commence a death benefit income stream or pay the balance as a lump sum death benefit out of the fund. However, with the passing of this Bill and with the changes applying retrospectively, Jane now can accept the reversionary TRIS without any concern. As she is a reversionary beneficiary the TRIS will be in the retirement phase and the cashing requirements of John’s death benefit will be met by the reversionary TRIS being paid to her.
It is pleasing to see that this irregularity introduced as part of the superannuation reforms has been fixed, as this provides much needed confidence for those members who are in receipt of a reversionary TRIS or who are looking to establish a new TRIS which will be automatically reversionary upon their death.