The ATO has recently issued a private binding ruling allowing recipients of transition to retirement income streams (TRIS) to have their benefits taxed as if a lump sum had been paid, rather than a pension.

The benefit of having a TRIS amount taxed as a lump sum rather than a pension applies for those aged between 56 & 59, as the amounts are effectively tax-free up to a lifetime cap of $195,000 (this amount is current for the 2016 year). For those over 60, TRIS payments are tax-free whether they are taken as a pension or a lump sum so this strategy is unnecessary.

The following table illustrates the different outcomes between a pension and a lump sum. Please note, the following assumptions have been made when completing our calculations:

  • The member, let’s call him John, has annual salary income of $100k.
  • John is aged 56.
  • John’s superannuation entitlements are valued at $1M. As such, should John start a TRIS his annual minimum payment amount needs to be $40k.
  • John’s superannuation consists of 100% taxable* component, and therefore any pension amounts are added to his taxable income.

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As can be seen from the above table, by starting a TRIS and completing the relevant elections for it to be taxed as a lump sum payment instead of a pension, John has boosted his after tax income by $40,000.

Please note, before implementing this strategy there are a number of issues that need to be investigated and resolved on an individual basis. A short list of these issues is as follows:

  • At the moment the ATO has only issued a private binding ruling. This is only binding for the taxpayer that has received the ruling and not for the general public.
  • The taxable and tax-free components will impact on the tax treatment of a pension amount.
  • The paperwork requirements for a lump sum election are more specialised then with a straight pension.
  • An amount between the ‘minimum’ and ‘maximum’ still needs to be taken on an annual basis.
  • The $195,000 cap outlined at the start of this document is a lifetime limit. Any previous amounts applied against this cap must be considered.

The strategy outlined above, if done correctly, can save taxpayers thousands of dollars in tax which can then be used to boost retirement earnings in their later. However, it is possibly a closing window as the government looks at a number of superannuation reforms in the coming years.

If you would like more information regarding the strategy outlined in this article please contact your advisor at PJT Accountants & Business Advisors.

* The distinction between taxable and tax free components can provide significantly different outcomes from a taxation point of view, and not just in relation to pension payments. If you would like more information on the differences between taxable & tax-free components please contact our office.

 

GENERAL ADVICE WARNING: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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Jodie Thompson  ARN 277884, Wayne Patten ARN 277883, Matthew Dunn ARN 1243039 are Limited Authorised Representatives of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361

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