Important! Since 1 July 2017, the fund earnings on assets financing a transition-to-retirement pension (TRIP) are no longer exempt from earnings tax. Since 1 July 2017, a TRIP is no longer considered to be in retirement phase.
On 3 May 2016, in the 2016 Federal Budget, the Coalition (Liberal/Nationals) government announced that, from 1 July 2017, it intended to remove the tax exemption on pension fund earnings financing a transition-to-retirement pension (TRIP). The removal of the tax exemption is now law and applies to existing and new TRIPs since 1 July 2017. Superannuation changes creating this law received royal assent on 29 November 2016.
With the removal of the tax exemption on the earnings of TRIPs, you can now expect a TRIP is a lot less popular with older Australians. For those Australians who started a TRIP before the 2016 Federal Budget announcement, the change is certainly retrospective. Most Australians receiving a TRIP which started before July 2017, should have reviewed such an arrangement to decide whether such a strategy was still financially viable beyond July 2017.
Further, anyone continuing a TRIP beyond 30 June 2017 should have reviewed, or be reviewing, administration requirements and any potential capital gains tax relief (if applicable – more on this later in the article) in the transition from retirement phase to accumulation phase. For others, the possibility of retiring and moving to a regular account-based pension may have also been a consideration.
I expect many TRIPs ceased and reverted to accumulation phase. Alternatively, some Australians may have done the numbers and chosen to retire earlier than planned to retain the tax exemption on pension earnings.
Tip: For a summary of how the TRIP rules apply since July 2017, see SuperGuide article TRIPs: 10 important facts about transition-to-retirement pensions.
Why were TRIPs so popular?
The idea of working full-time one day and retiring the following day is fast becoming a trend of the past. Many Australians are experimenting with different versions of retirement, such as working fewer hours or changing careers. A popular option for those seeking a flexible retirement involved starting a transition-to-retirement pension (or TRIP). A TRIP typically involves replacing taxable employment income with concessionally taxed income sourced from a superannuation pension (although there is no tax-exempt pension earnings since 1 July 2017).
TRIPs were an innovative superannuation policy that facilitated a more gradual entry into retirement for Australians. Until 30 June 2017, one of the key reasons why TRIPs were compelling was that you could access your super savings without retiring from work, while also benefiting from the tax advantages associated with superannuation pensions.
Until 30 June 2017, the three most common variations of a TRIP involved:
- continuing work as usual, but boosting income with concessionally taxed super pension income (since July 2017, the earnings on such a pension are subject to 15% earnings tax, rather than being tax-exempt)
- working fewer hours but maintaining the previous lifestyle by supplementing that lower work income with concessionally taxed super pension income (since July 2017, the earnings on such a pension are subject to 15% earnings tax, rather than being tax-exempt)
- salary sacrificing into a super account to reduce taxable income, while also growing the super account with the added benefit of tax-exempt pension earnings, while receiving a TRIP paying concessionally taxed super benefits. (Since July 2017, earnings on transition-to-retirement pensions are subject to 15% earnings tax, rather than being exempt from tax.)
This third, and most popular TRIP strategy could help you cut your annual income tax bill, while also boosting your superannuation account (until 30 June 2017). The drop in disposable income through salary sacrificing, was fully or partially replaced by pension payments sourced from the TRIP (where earnings on TRIP assets were not taxed through to 30 June 2017). I explain this option later in the article.
How did the old TRIP rules work?
Until 30 June 2017, a TRIP could provide a lot of flexibility depending on your age, your income, how much super you have, and how much income tax you were paying.
By starting a superannuation pension, such as a TRIP, the earnings on the TRIP account were exempt from tax (until 30 June 2017), which meant more money was retained in the pension account for your retirement. The taxable component of super benefits paid out from the pension account to the fund member were eligible for a 15% pension rebate (for fund members under the age of 60), or were tax-free (for members aged 60 years or over). If the pension benefit included a tax-free component, then this portion of the benefit payment was tax-free regardless of the age of the member.
Anyone considering taking a TRIP must have reached preservation age. If you were born before 1 July 1960, then your preservation age is 55 years. If you were born on or after 1 July 1960, then your preservation age is at least 56 years, and if you were born on or after 1 July 1961, then your preservation age is at least 57 years, and if you were born on or after 1 July 1962, then your preservation age is at least 58 years. If you were born after June 1964, your preservation age is 60 years. For more information on your preservation age see SuperGuide articles Accessing super: What is my preservation age?, Accessing super: Preservation age moves to 59 years and Retirement Age Reckoner: Discover your preservation age and Age Pension age.
You must withdraw no more than 10 per cent of your transition-to-retirement pension account balance (as at 1 July) each financial year, and you must withdraw at least 4 per cent of your account balance each financial year.
Generally, you cannot convert your TRIP into a lump sum unless you retire, turn 65 or satisfy another condition of release. The restriction on taking lump sums means that the TRIP is non-commutable, that is, the fund member is not permitted to take a lump sum, or otherwise access the balance of the transition-to-retirement pension account.
Before July 2017, the one exception to the non-commutable rule was when the fund member had some unrestricted non-preserved benefits in the TRIP account. You may have these types of benefits if you were a fund member before July 1999. If so, these benefits were not preserved and could be accessed as a lump sum from the TRIP account, without breaking the TRIP rules. Until 30 June 2017, the lump sum amount counted towards the minimum pension payment amount required to be paid each year, but it did not count towards the 10 per cent maximum payment limit. Note that the Coalition government has now changed the laws so that, since July 2017, the option of treating a pension payment as a lump sum is no longer possible.
Note: Before July 2017, the TRIP account was also required to be kept separate from the superannuation account that accepts contributions for the fund member.
What were the pre-July and post-July 2017 tax benefits of a TRIP?
Apart from those Australians seeking to gradually transition into retirement, a popular TRIP strategy before July 2017 was to: use a salary sacrifice arrangement when making super contributions into your super fund, up to your concessional contributions cap (after also allowing for your employer’s Superannuation Guarantee contributions), while replacing part, or all, of your sacrificed income, with pension payments from a TRIP.
For example, Gerald was 57 and earnt $120,000 a year plus super. He had $200,000 in a super account. He started a TRIP with his super benefits (see table below), which meant he must withdraw at least $8,000 from his pension account each year. Gerald decided he wanted to take full advantage of his concessional contributions cap of $35,000 for the 2016/2017 year (applicable to anyone aged 49 years or over as at 30 June 2016).
Gerald salary sacrificed $23,600, in addition to his employer’s 9.5 per cent Superannuation Guarantee contributions of $11,400, taking total concessional contributions to $35,000. By salary sacrificing and receiving TRIP income of $8,000, Gerald’s taxable income dropped from $120,000 to $104,400. He also received a 15 per cent tax rebate of $1,200 on his TRIP income.
By salary sacrificing and starting a TRIP, Gerald received a lower after-tax income, but accumulated a much larger superannuation benefit. He pays around $6,100 less in income tax and Medicare levy (but about $3,500 more in super contributions tax), and increases his super account at the end of the year by $14,000 more than if he hadn’t used the TRIP strategy. If Gerald was aged 60 years or over, he could roughly save a further $2,000 in income tax and Medicare levy, or more specifically, $1,920.
Note: Gerald’s scenario changes significantly for the 2017/2018 year, and 2018/2019 year, and future years. The tax exemption on pension earnings for TRIPs was removed, effective since July 2017. The last column in the table below illustrates the impact of the removal of the tax exemption on TRIP investment earnings PLUS the drop in the contributions cap from $35,000 to $25,000 (which took effect since 1 July 2017).
Post-July 2017 outcome: Since 1 July 2017, because of the removal of the tax exemption on TRIP fund earnings AND the drop in the concessional contributions cap, if Gerald continues the TRIP and salary sacrifices into his super account, Gerald’s income tax bill will increase by $3,900 (compared with his 2016/2017 year strategy) because he can only make concessional contributions up to $25,000 (including SG contributions). Further, although a TRIP is no longer considered a superannuation income stream in retirement phase, Gerald will still retain the 15% pension tax offset. His super account will drop by $10,600 (compared with his 2016/2017 year strategy), because the concessional contributions cap has dropped, and he loses the tax exemption on fund earnings. The strategy effectively becomes a plain vanilla salary sacrifice strategy (but with a $1,200 tax benefit from the 15% pension tax offset), although a larger super account (compared with not salary sacrificing) does mean a greater amount of savings subject to 15% earnings tax, rather than having earnings subject to personal income tax rate.
15% pension tax offset remains in place: According to an ATO spokesperson: “From 1 July 2017, the earnings from assets supporting a transition to retirement income stream (TRIS) [TRIP] will no longer be subject to an earnings tax exemption, i.e. will no longer be exempt current pension income. The change is only in relation to the tax treatment at the super fund level – there has been no change to the tax treatment of a TRIS benefit paid to an individual member. Therefore there are no changes to the way tax offsets operate for the individual receiving the TRIS payment. A TRIS [TRIP] will continue to meet the definition of a superannuation income stream in the Income Tax Assessment Act 1997 (ITAA), however it will not be a superannuation income stream in the retirement phase under the new section 307-80(3)(a) of the ITAA.”
Gerald’s TRIP and salary sacrifice strategy (age 57)
|Pre-July 2017 position||TRIP and salary sacrifice (2016/2017 year)||TRIP and salary sacrifice since 1 July 2017|
|Income tax payable||($32,032)||($26,260)||($29,960)|
|Medicare levy payable||($2,400)||($2,088)||($2,288)|
|Total tax and levy payable||($34,432)||($28,348)||($32,248)|
|Add 15% pension rebate||–||$1,200||$1,200|
|After-tax and after-levy income||$85,568||$77,252||$83,352|
|Gerald’s super savings|
|Less contributions tax||($1,710)||($5,250)||($3,750)|
|Investment return (7%) on opening account balance of $200,000||$14,000||$14,000||$14,000|
|Less Investment tax (15%)||($2,100)||–||($2,100)|
|Net increase in super account||$21,590||$35,750||$25,150|
Table source: Figures calculated by Trish Power, and are for the purposes of illustration only. Anyone considering the tax-effectiveness, or otherwise, of a TRIP and salary sacrificing strategy should seek tax advice.
For more information on how TRIPs work, and what the July 2017 changes mean for current TRIPs, see the following SuperGuide articles:
- Super pensions: Reviewing the merits of keeping a TRIP
- TRIPs: 10 important facts about transition-to-retirement pensions
- Transition-to-retirement pension (case studies): How does a TRIP work?
- Transition-to-retirement pension: Can I work full-time and what form do I fill in?
For information on the other July 2017 superannuation changes, including capital gains tax relief, see the following SuperGuide articles:
- Latest superannuation rules: 2018/2019 guide
- Latest superannuation rules: 2018/2019 guide
- CGT relief and the $1.6 million transfer balance cap, and TRIPs
For ATO guidance on CGT relief and TRIPs
For ATO guidance on CGT relief and TRIPs, see the ATO Law Companion Guideline, LCG2016/8 Superannuation reform: transfer balance cap and transition to retirement transitional CGT relief for superannuation funds.