TRISs: Can they convert? Even if they can convert, do they deliver the (earnings tax exemption) goods when they convert?

There is a current controversy as to whether transition to retirement pensions (TRISs) can automatically convert to account-based pensions or must they be stopped and restarted as account-based pensions.  Some take the view that TRISs cannot convert to account-based but must be commuted, rolled back to accumulation phase and then restarted as an account-based pension.

There is also another controversy even if the TRIS can convert, whether the conversion will be effective for the purpose of being entitled to the earnings tax exemption.  This second controversy turns upon the introduction of a new superannuation concept (as if there are not enough of them already!) of an income stream being in “retirement phase”.

At SUPERCentral we have always taken the view that TRISs are simply account-based pensions which are subject to two restrictions: namely, the 10% pension ceiling and the “no cashing out” restriction.  Therefore, they can, if appropriately documented, convert to account-based pensions.  Our basis for this view (apart from naked self-assertion) is that we do have some arguments.  These will be explained in the next few paragraphs.

The first restriction provides that the maximum pension which can be paid in a financial year is subject to an upper limit or ceiling – being 10% of the initial pension account balance for first year and thereafter to 10% of the pension balance at the previous 1 July.

The second restriction is that while TRISs can be commuted, the lump sum arising from the commutation must (subject to certain express exceptions) be retained in the superannuation system and cannot be paid as a lump sum to the member.  Those express exceptions include giving effect to a release authority and at or before the commutation, the member has satisfied an unrestricted release condition (such as retirement or attaining age 65).

The fact that TRISs are a special type of account-based pensions is shown by the SIS Regulation which defines permitted types of pensions – SIS Regulation 1.06 – does not even use the expression “transition to retirement income stream”.  The definition of a TRIS is set out in SIS Reg 6.01 and the definition specifies that a transition to retirement income stream is a pension which has an account balance, which must pay a minimum amount each year, which is only transferrable on the death and which cannot be used as a security for a borrowing (which are the elements of an account-based pension) and which also satisfies the two restrictions.

Whether TRISs can convert to an account-based pension depends entirely upon how the terms of the pension are drafted.

If the terms are drafted so that on the occurrence of an unrestricted release condition (typically attaining age 65 or retirement) the two restrictions cease to apply, then the pension is automatically converted to being an account-based pension.  Putting the argument another way – the pension was always an account-based pension subject to two additional restrictions.

However, if the terms simply mirror the text of paragraph(1)(b) of SIS Regulation 6.01AB, and provide that the restriction as to cashing-out continues albeit with a further exception to the cashing-out restriction being the satisfaction of an unrestricted release condition, then the TRIS has not converted to being an account-based pension.  But, strangely, the TRIS will, from the occurrence of the unrestricted release condition, be materially identical to an account-based pension.

Sometimes, fine distinctions arise simply from subtle differences in drafting.

The second controversy relates to the issue of whether a TRIS, in respect of which an unrestricted release condition has occurred, will from 1 July 2017, qualify as being a superannuation income stream which is in “retirement phase”.   Unfortunately, the relevant provision (s307-80 (3)of the Income Tax Assessment Act 1997) simply provides that a transition to retirement income stream cannot be in the retirement phase and the provision makes no distinction between a TRIS in respect of which an unrestricted release condition has occurred and a TRIS which in respect of which an unrestricted release condition has not occurred.

From a policy perspective a TRIS in relation to which an unrestricted release condition has occurred should have a tax treatment identical to that of an account-based pension.  It seems that the subtly of the SIS pension definitions has been missed by the parliamentary draftsman.

Our view is that if the pension is documented as an account-based pension which is subject to the two restrictions (ie 10% pension ceiling and the no-cashing restriction) then once those restrictions cease to apply – the pension is not a transition to retirement pension (within the meaning of SIS Reg 6.01 - as the two restrictions no longer apply).