Transition to retirement
1 July 2017 reform and transition to retirement income streams
Retirement phase income streams
Retirement phase income streams do not include transition to retirement income streams or non-commutable allocated pensions and annuities, unless the recipient has satisfied the retirement, reaching age 65, terminal medical condition or permanent incapacity condition of release (see 'TTR income stream becoming a retirement phase income stream' below for more information).
If an income stream is excluded from being a retirement phase income stream:
- the assessable income and capital gains earned on assets supporting the income stream are subject to 15% tax in the fund
- the value of the income stream is counted as part of a person's 'accumulation phase value' for their 30 June total superannuation balance, and
- the income stream does not count toward the person's transfer balance account.
TTR strategies and super reform
Prior to 1 July 2017
Prior to 1 July 2017, the TTR strategy of continuing to work, while salary sacrificing employment income, and topping up cash flow from a transition to retirement income stream, provided two separate benefits:
- earnings on TTR income stream assets were exempt from tax
- TTR income stream payments may be more concessionally taxed than the salary they replaced.
From 1 July 2017
From 1 July 2017, the tax effectiveness of this TTR strategy was reduced. The three main super reforms that negatively impacted this TTR strategy are:
- assessable income and capital gains on assets supporting TTR income streams being subject to 15% taxation
- reduction in the concessional contributions cap to $25,000 and
- reduction in Division 293 income threshold to $250,000.
On a positive note, the ability for employees to make personal concessional contributions from 1 July 2017 without having to meet a 10% test may allow clients who were previously unable to make concessional contributions (for example because their employer didn't allow salary sacrifice contributions) to take advantage of a TTR strategy.
TTR income stream earnings taxable
From 1 July 2017, income and realised net capital gains generated by assets supporting a TTR income stream are taxed at 15%, in the same way that superannuation in the accumulation phase is taxed.
There are no grandfathering provisions. Both new and existing TTR income streams are impacted by this change. As a result, all clients undertaking TTR strategies are impacted as earnings on assets supporting TTR income streams which were tax-free prior to 1 July 2017 are, from 1 July 2017, taxed at 15%.
TTR income stream becoming a retirement phase income stream
A TTR income stream will become a retirement phase income stream where the member meets one of the following conditions of release:
- Attains age 65, regardless of whether the client has notified the income stream provider
- Notifies the income stream provider that they satisfied one of the following conditions of release:
- Terminal medical condition
- Permanent incapacity
Where a TTR income stream is a retirement phase income stream, earnings on assets supporting the income stream become tax-free. As a result, clients who have met one of these conditions of release may wish to contact their fund to ensure their TTR income stream is recognised as a retirement phase income stream.
However, caution should be exercised when taking action to recognise a TTR income stream as a retirement phase income stream, as retirement phase income streams count towards the client's transfer balance cap.
In the case of a client reaching age 65 (which is by itself one of the required conditions of release), the client's fund is required to automatically recognise their TTR income stream as a retirement phase income stream.
Reduction in concessional cap to $25,000
From 1 July 2017, the concessional contributions cap reduced to $25,000 for all clients. This is an effective reduction of $10,000 for clients who are eligible to commence TTR income streams.
This change impacts any clients undertaking TTR strategies which involve concessional contributions (including superannuation guarantee (SG), salary sacrifice or personal concessional contributions) of more than $25,000.
Reduction in Division 293 tax income threshold to $250,000
Division 293 tax is detailed in section 3.14.
Prior to 1 July 2017, clients whose income plus low tax contributions exceeded $300,000 were subject to an additional 15% tax on the proportion of their low tax contributions that exceeded the $300,000 threshold. This is known as Division 293 tax.
With low tax contributions generally being a client's non-excessive concessional contributions, clients undertaking TTR strategies prior to 1 July 2017 that involved concessional contributions were impacted once their income and concessional contributions exceeded $300,000.
From 1 July 2017, the income threshold for Division 293 tax was reduced to $250,000. Clients undertaking TTR strategies involving concessional contributions will therefore be impacted by Division 293 tax if their income plus low tax contributions exceeds $250,000.
Impact of changes on TTR strategies
- The benefit of a TTR strategy has been dramatically reduced from 1 July 2017, both due to the taxation of TTR earnings and reduction in concessional cap.
- Clients under 60 gain only a small/marginal benefit by undertaking TTR strategies under the new rules, unless they have a large tax-free component.
- Clients aged 60 or over still benefit to a reasonable extent from a TTR strategy as long as they have some concessional cap available.
- Higher income employees are likely to benefit less than lower income employees from a TTR strategy, as the amount of concessional cap available is reduced by SG.
- Low income clients may benefit from TTR strategies, particularly where they involve non-concessional contributions (to access co-contribution), spouse contributions (to access spouse contribution tax offset) or concessional contributions (to access low income superannuation tax offset).
- TTR strategies work better for self-employed people who do not receive SG, as their entire concessional cap is available for use under the strategy.
- Due to the concessional cap reduction, the maximum amount that a client should use to commence a TTR strategy has significantly reduced under the new rules.
- Where a TTR strategy is used to equalise superannuation balances, pay off debt or fund concessional contributions into a spouse's superannuation account, the effectiveness of a TTR strategy can be significantly improved.
Last modified: Friday, November 16, 2018