How do we convert a TRIS to an ABP after 1 July 2017? The industry had a clear idea how this should work. A TRIS converts to an ABP when meeting a condition of release – no need to stop the TRIS and start an ABP. But then the ATO declared that a TRIS can’t do that. A TRIS does not automatically convert to an account-based pension. A TRIS can only ever be a TRIS. This is bad news.
TRIS to an ABP
How do we covert a TRIS to an ABP? Before 1 July 2017, this wasn’t a big issue. When a TRIS no longer had the cashing and commutation restrictions attached, it became an account-based pension per reg 1.06(9A) SISR, or stayed a TRIS. Either way it was tax exempt.
But then the super reforms removed the tax exempt status of TRIS. And amended s 307-80. So now the question is whether a TRIS can directly convert into an ABP? Or needs to stop and then start as an ABP?
To listen while you drive, walk or work, just access the episode through a podcast app on your mobile phone.
The ATO view is that a TRIS doesn’t enter the retirement phase even when a member meets a condition of release. Be it that the member notifies the trustee of that fact or turns 65.
The argument is that a pension commenced as a TRIS always remains a TRIS. Even after the recipient satisfies a condition of release with a nil cashing restriction.
The explanatory memorandum to the Bill in paragraph 1.131 was the first to take this position:
” As a superannuation income stream that is established as a TRIS will always retain its character as a TRIS, the restriction introduced as a part of the Amending Act would always prevent TRISs from being in the retirement phase even after the holder later satisfies a condition of release with a nil cashing restriction”
The ATO confirmed this position and stated on its website,
“Our view is that the current law does not facilitate an “auto conversion” of TRIS to a different or new pension or income stream. The same TRIS continues on and remains a TRIS until such time as it ceases. The law provides that once a nil cashing restriction condition of release is met, the limitations of a 10% annual maximum payment and commutation restrictions are no longer applied.”
The widespread industry view takes the opposite stance.
The industry argues that a TRIS stops being a TRIS and reverts to an account-based pension on the member satisfying a condition of release.
A TRIS is a pension that meets the standards of an account-based pension as prescribed by reg 1.06 (9A)(a), but just got a couple of restrictions that an ABP doesn’t have.
When a member satisfies a condition of release with a nil cashing restriction, these restrictions fall away. So now the TRIS is essentially an account-based pension. It doesn’t make sense to argue that TRIS restrictions can fall away so that the pension is identical to an account-based pension, but that the pension is still a TRIS anyway, just as a matter of law.
Why all this arguing? What is the issue?
There are other issues, but the one big issue is the dilution of tax-free components.
If a TRIS can’t directly convert to an account-based pension but has to stop and then start as an ABP, it will lose the crystallisation of the tax-free/taxable components. Everything goes back into the big accumulation “bucket”. And chances are that the accumulation bucket is not 100% tax-free, but the TRIS might be just that.
So until the ATO makes the final call on this, hopefully after consulting the industry, TRISs are like a landmine. You don’t know whether they will go off or not when a member meets a condition of release. Let’s just hope that this gets sorted soon.
Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 27 August 2019