by John Wasiliev 19 Oct 2017 Australian Financial Review
One of the strategic changes to superannuation rules from July 1 was the loss by a transition to retirement income stream (TRIS) not in retirement phase of its entitlement to tax-free investment earnings, a concession that is now restricted to retirement phase pensions.
Given a widely-held claim that a key reason thousands started a pre-retirement transition strategy was to access the tax benefits, a reader asks: is a TRIS still worth having and under what circumstances?
The answer, say prominent self-managed super experts Daniel Butler of DBA Lawyers and Graeme Colley of SuperConcepts, is that it still is, although it is less likely to be tax-driven.
Whether a TRIS is still worthwhile, says Colley, should take into consideration not just the withdrawal of the investments earnings tax break that super pensions receive but the benefits that remain.
These benefits include being able to access your super before you have retired and utilise this if you urgently need a source of cash flow. The primary qualification necessary to allow this to happens is that you have reached your superannuation preservation age, currently 57.
Since mid-1999 all contributions to super made by a member or on their behalf by an employer are required to be preserved until what is described as a condition of release has been met.
Other than death, all other conditions require you to achieve your preservation age.
One of these conditions – starting a TRIS – comes with other strings attached, namely being restricted to taking a preserved benefit as an income stream that can’t be greater than 10 percent of the account balance when you start the TRIS.
You must also satisfy a minimum withdrawal obligation, which for anyone under 65 is 4 percent of the starting account balance.
Over the years, I’m aware of a number of circumstances where an entitlement to start a TRIS has been a lifesaver for anyone who has been seriously cash-strapped.
A recent example was a small business owner with a big tax bill she hadn’t allowed for that was stressing her out. Being over preservation age and with some super savings provided her with a solution.
A small business that needs cash flow is a common reason for starting a TRIS, says Colley.
If you are going to work through to 65 and are under your preservation age and have funded your superannuation properly through a previous job, a TRIS can provide important supporting income that can be a valuable source of cash flow – to start a small business, for instance. It can also fund time off work between jobs
Using a combination of tax-concessional super contributions and a TRIS was a strategy I outlined a couple of years ago in a column about repaying a debt using TRIS income.
Making a tax-deductible contribution to super, says Colley, can give you a marginal benefit if you propose to withdraw this as a TRIS amount for a cash flow reason, especially if you are over 60 and the TRIS income is tax-free.
For anyone under 60, TRIS income is taxed at your marginal tax rate (the average tax you pay on your income) less a 15 percent tax rebate.
TRIS income can also be part of a superannuation contribution strategy, including a re-contribution strategy where a TRIS amount goes towards either maximising a tax-deductible contribution or making an after-tax non-concessional contribution. There are benefits in having a proportion of after-tax super in a fund.
Butler says the key tax change on July 1 for those with an existing TRIS or those proposing to start one was the loss of the investment earnings exemption if their TRIS was not classified as being in the retirement phase. But there are opportunities in making salary-sacrifice contributions to super.
Consider the example of John Smith, age 57, who earns a salary of $100,000 through employment on which he pays $19,822 for the first $87,000 of income and then 37¢ for each $1 over $87,000.
On the $100,000 he pays $24,632 in tax and the 2 per cent Medicare levy of $2000.
But say John wants to salary-sacrifice his maximum tax-concessional amount of $25,000 into his super fund.
No real tax savings
As an employee, his employer would have to pay $9500 into his fund, being the 9.5 percent minimum superannuation guarantee obligation based on his $100,000 salary.
With a concessional contribution cap of $25,000, the maximum salary-sacrifice he can make without getting into excess contributions tax territory is $15,500.
If John agrees with his employer to contribute an additional $15,500 on top of his existing $9,500 compulsory super contributions, he will initially save 22 percent on each dollar of the additional $15,500 super contributions or $3,410 (the 37 percent tax rate less the 15 per cent tax rate deducted by the super fund).
But say he needs the $15,500 he contributes to super to live off and withdraws this from his TRIS and that his TRIS has no non-concessional proportion. Such a proportion would create a tax-free percentage that would reduce any tax he would pay on the TRIS income.
Because he is under 60, the TRIS benefit will be taxable so it will be added to his income where it will be taxed at 37 percent less a 15 percent tax rebate, or 22 percent.
This suggests there won’t be any real tax savings, says Butler, where a salary-sacrifice strategy is employed by someone under 60 who supplements super contributions with TRIS payments.
So where does this leave a TRIS? For someone under 60 who has not retired, says Colley, the principal benefit will be the scope to access super as a source of cash flow once they reach preservation age.
Original article here