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Reversionary TRISs - Technical deficiency currently being amended
One of the anomalies of the "Fair and Sustainable" superannuation changes was to prevent a transition to retirement income stream (TRIS) which was reversionary from transferring to a beneficiary if the beneficiary was not in retirement phase at the date of transfer. This anomalous outcome will soon be consigned to history with legislation currently before Parliament to permit a reversionary TRIS to transfer to the nominated reversionary beneficiary whether or not the beneficiary is in retirement phase.
By way of background a reversionary TRIS is simply a transition to retirement income stream, the terms of which, provide that on the death of the member ("the primary beneficiary") receiving the income stream, the income stream automatically transfers to and becomes payable to the nominated reversionary beneficiary. Typically, the nominated reversionary beneficiary is the spouse of the primary beneficiary.
The ATO has taken the view that a TRIS does not become an account-based income stream even when the primary beneficiary is in retirement phase (for example, when the primary beneficiary has attained age 65 or is retired for super purposes). However, once the primary beneficiary is in retirement phase, the TRIS is then entitled to the earnings tax exemption (as account-based income streams are) and the restriction on "cashing out" and the "10% payment ceiling" cease to apply: in short a TRIS in this situation has the same tax features as an account-based pension. However, under current legislation, a reversionary TRIS (unlike a reversionary account based income stream) cannot revert to a nominated beneficiary, if the nominated beneficiary is not in retirement phase at the date of death of the primary beneficiary. There is no policy justification for this different treatment. Under current legislation, the superannuation interest supporting the reversionary TRIS could still be applied as an account-based income stream to the nominated beneficiary. The current legislation simply prevents the reversionary TRIS directly transferring to a nominated beneficiary if the beneficiary is not then in retirement phase but could transfer indirectly to the nominated beneficiary by means of issuing an account-based income stream to the nominated reversionary beneficiary.
The reason for this exception is that from 1 July 2017 (the start date of the "Fair and Sustainable" superannuation changes) it has been a requirement that death benefits can only be paid as pensions if the pension is in retirement phase. The anomaly was that a transition to retirement pension was only considered to be in retirement phase if the recipient of the pension was in retirement phase. If the TRIS transferred to a reversionary beneficiary who is not in retirement phase at the date of death, the income stream would not qualify as being in retirement phase and so could not qualify as a permitted death benefit.
While there was a work around to the anomaly (stopping the reversionary TRIS and issuing an account-based income stream) there are a number of significant issues with the work around. First, there is the inconvenience of having to stop the existing pension and start a new pension. Secondly, there is the possibility that as the pension cannot revert to the reversionary beneficiary it may then be treated as a death benefit which could be payable to a different beneficiary.
Fortunately, 14 words will be inserted into s308-80(3)(a) of the Income Tax Assessment Act 1997 which will have the effect of overcoming this anomaly. Once the amendments are in place (and they will be retrospective from 1 July 2017) a reversionary TRIS which transfers to the reversionary beneficiary will be treated as being in retirement phase on the death of the primary beneficiary even if the reversionary beneficiary is not yet 65 or not yet retired at the date of transfer.
The necessary amendment is contained in item 43, Part 65 of Schedule 8 to the Treasury Laws Amendment (2018 Measures No 4) Bill 2018 which is currently before the Senate.