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Transition to retirement

Transition to retirement strategies

Section: 15.6

Transition to retirement Pension (TTR): removal of earnings tax exemption - Federal Budget 4 May 2016

Effective 1 July 2017

The tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed from 1 July 2017. Earnings will then be taxed at 15 per cent. This changes applies irrespective of when the TTR income stream commenced, i.e. no grandfathering applies.

The Government states that reducing the tax concessional nature of transition to retirement income streams will ensure they are fit for purpose and not primarily accessed for tax minimization purposes.

Further, individuals will no longer be able to treat certain superannuation income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000.

How will this affect your client?

For clients aged 60 or over, TTR strategies may still be worthwhile as pension payments are tax free and allow tax effective salary sacrifice contributions. However for clients under age 60, the tax benefits are minimal.

The taxation of earnings in pension phase will only apply to 'transition to retirement' income streams where the client has reached preservation age but not yet retired. Presumably income streams where the client has met a full condition of release such as retirement will continue to have the earnings tax exemption apply. Clients may look at arrangements involving ceasing a gainful employment arrangement over age 60 or ceasing work and declaring permanent retirement to meet the retirement condition of release.

From a superannuation fund perspective, administering the taxation of earnings in pension phase for transition to retirement pensions will add complexity.

Last modified: Tuesday, May 2, 2017