A transition to retirement income streams (TRIS) can be a useful tool for members of a self-managed super fund (SMSF) who have reached their preservation age and wish to reduce their working hours without reducing their income.
Like account-based pensions, a TRIS must meet minimum pension standards each year. This involves taking the minimum pension payments each income year based on the age of the member and the account balance at 1 July (or commencement).
In addition to meeting the minimum pension standards there is an additional maximum pension payment limit where the TRIS is not in retirement phase, which the fund must adhere to in order to meet the cashing restriction applying to a TRIS.
Maximum annual payment limit for non-retirement phase TRIS
From 1 July 2017 a TRIS is not in retirement phase where the member has not attained age 65 or reported a condition of release to the SMSF trustee. This income stream will continue to be subject to cashing restrictions.
There is a maximum payment limit of up to 10% of the 1 July (or pension commencement) account balance in each financial year while the TRIS is not in retirement phase. This maximum amount is not pro-rated if the pension commenced or ceased in the year, and the 10% value is not rounded to the nearest $10 like the minimum payment requirement is.
To the extent the balance of the TRIS is preserved monies, the member cannot make lump sum payments. If payments are made from restricted non-preserved or preserved benefits that exceed the 10% maximum payment limit this will be a breach of the Superannuation Industry (Supervision) Regulations (SISR) payment standards.
Even though from 1 July 2017 a non-retirement phase TRIS is no longer eligible to claim exempt current pension income (ECPI), the income stream must continue to meet the pension standards in order to remain a superannuation income stream.
If the pension standards are not met through exceeding the maximum payment limit then there are consequences the trustee should be aware of.
Consequences of exceeding the maximum payment limit
The ATO may make the fund non-complying and penalise the trustee for exceeding the maximum payment limit. They will treat the TRIS as not being a superannuation income stream in the year and it will be treated as having ceased for tax purposes at the start of the income year. Any payments made during the year (not just the amount in excess of the 10% limit) will be treated as superannuation lump sums for income tax purposes and lump sums under the SISR. These will be treated as early access to member benefits and a breach of the SIS payment standards, they will be included in the member’s assessable income to be taxed at marginal rates without any offsets.
The trustee would need to commence the income stream in the following year if the pension standards are again met, and this will include a requirement to re-calculate the tax free and taxable components.
More information about running a TRIS can be found here on the ATO website.