Tax ruling confirms strategy for under 60 retirees

As recent update by the ATO has confirmed that in certain circumstances, someone under the age of 60 (but over their preservation age of at least 55) drawing a Transition to Retirement Income Stream (TRIS) may take a tax free payment from their SMSF – but only in certain circumstances.

The ATO in SMSFD 2013/2 confirmed that an account-based pension can be partially commuted to a lump sum to enable a member to take advantage of their low rate cap. (The low rate cap for the 2014/2015 financial year is $185,000.) However, the ATO in paragraph 11 of this SMSF determination stated:

“11. This Determination does not apply to an account based pension that is a ‘transition to retirement income stream …”
The ATO has until very recently had no confirmation on whether a member with a transition to retirement income stream (TRIS) could implement this strategy.

However, the ATO updated the TRIS information on its web page on 18 September 2014 to confirm that to the extent that a member has unrestricted non-preserved benefits (UNPBs) funding their TRIS, they can also partially commute such an amount to take advantage of their low rate cap.

Also, importantly, there lump sum will also count towards the four percent minimum pension draw down.

Why is utilising the low rate cap advantageous?

If you are under the age of 60, then you can make an election for a payment from your fund to be treated as a lump sum up to an indexed life time limit that is currently $185,000.  The election has to be made prior to or at the time of making the payment and it must be in writing.  Superfund Partners can obviously assist with this documentation.

What this means is that the benefits inside your fund that are supporting the pension are exempt from tax, and the amount you withdraw (up to the $185,000 cap) is also exempt from tax*.

*Please note that the amount taken as a lump sum is counted for the purposes of the Medicare Levy (and Surcharge) as well as the Budget Repair Levy – this is because they are levies – not taxes.

UNPBs are needed

Restrictions on withdrawals from a TRIS do not prevent you from paying a member all or part of their unrestricted non-preserved benefits (UNPBs). 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.

Generally for a members benefit to include UNPBs they need to have permanently retired some time after reaching their preservation age (see below).  If the member has no UNPBs then a lump sum payment cannot be made and the strategy cannot be utilised.  There may be other limited circumstances where the members benefit may include some UNPBs – this information can be found on the member statements prepared as part of your SMSF accounts.

Summary

If implemented correctly for someone who fits the criteria above, this strategy can really turbo-charge a TRIS as it provides the best of both worlds – tax free earnings within the SMSF as well as the ability to withdrawal amounts tax free while under the age of 60.

A detailed example can be found in the following article: Key considerations from recent TRIS clarification by Dan Butler of DBA Lawyers (parts of this article are also attributable to Dan Butler of DBA Lawyers).

Director at Superfund Partners. I love working in the SMSF space. Self-managed super funds are more than just a savings vehicle - they enable people to truly take control of their financial situation which is key to achieving happiness. Leading the Superfund Partners team is a privilege - they are a great crew and they always put others first.