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My client, an SMSF Member has just died - What do I do now?
    • Situations where not to use binding Death Benefit Nominations
    • Death when member is on Pension Age - Transfer Balance Account requirements
    •  
    • Trust Deed puzzle: Reversionary Pensions Vs Death Benefit Nominations
    • Date: 20-Feb-2018 
    • Time: 03:00 PM to 04:00 PM

 

Transition to Retirement Income Pensions (TRIP)

Over the past few months, I’ve taken one question more than any other "Can Transition to Retirement Income Pensions (TRIP) be paid to reversionary beneficiary in case of death?" My answer till now has been "No - But dependants of deceased member can receive pensions when a member on TRIP dies". But soon my answer will change to "Yes" once the government passes new law.

To really understand the whole problem and reach the "Oh Ah" moment, let's go to the base of the issue and discover why the government has decided to change legislation again.

 

Rules prior to 30th June 2017

When a working member of a fund had reached their preservation age, they could commence a TRIP, where they contributed a part of their salary and SG contribution to super in their accumulation account and drew a pension from their pension account (TRIP account).

The benefit of this strategy was that any income earned by assets on TRIP were exempt from income tax. If assets were not segregated (pension assets were mixed with accumulation assets), the fund applied for an actuarial certificate and a proportion of income was claimed as exempt pension income.

 

What happened from 1st July 2017?

In May 2016 budget the government changed the law and any income earned by assets which are not in "Retirement Phase" were taxable.

Since members who were drawing a TRIP were not "Retired" and still working, assets supporting a TRIP were not considered to be in "Retirement Phase". Later Superannuation (objective) 2016 Bill, Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 and Superannuation (Excess Transfer Balance Tax) imposition Bill 2016 were passed and a new term "Transfer Balance Account" (TBA) was introduced where members who wanted to commence "Retirement Phase" pensions had to credit their TBA up to $1.6M, any amounts above this amount had to be held outside "Retirement Phase" that is in accumulation account.

Any commencing or retirement phase pension was a credit to TBA and if they wanted to stop or commute their pensions to accumulation account it would debit their TBA. Each entry in the TBA has to be reported to tax office.

 


A D V E R T I S E M E N T

 

 

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Elias AkeriSMSF Auditor Number 100150089 ,Melton Partners Accountants

 

We have been using online SMSF audit since 2013 and have integrated with our website in 2014. Manoj and his team helped us with designing & creating our current website. Online SMSF Audit has helped the business to increase by 10 fold which would have been impossible on how I was auditing earlier (manually). I have now set a target to audit 5,000 funds every year, which I know is possible on the online system. I highly recommend integrating the audit tool with your website to create a truly online business with significant higher selling price than an ordinary audit practice. I am a very keen user of technology and excited about Actuarial Certificate which my referring accountants can purchase for $55 - digital disruption at it's best! 

Christopher BastinSMSF Auditor Number 100173859 ,Just SMSF Audits

 

 


What happened to TRIP from 1st July 2017?

Fund members who were on TRIP prior to 30th June 2017 were allowed to continue their TRIP from 1st July 2017, however the balance of their TRIP account was considered outside "Retirement Phase"  (subsection 307‑80(3) of ITAA).

I prefer to refer TRIP from 1st July 2017 to have characteristics of both Accumulation and Pension accounts. TRIP looked like an Accumulation account because income on the underlying assets was taxable like an accumulation account however, members could withdraw from their TRIP account like a normal account based pension, albeit with a maximum of 10% of balance as on 1st July each year or 10% of the balance at commencement for a mid-year TRIP commencement.

 

What happens when the member retires?

The rules were amended again in late June 2017 by Treasure Laws amendment (2017 measures No.2) Bill 2017 where in relation to the TRIP rules were relaxed and existing prohibition on TRIPs ever being in the retirement phase were removed. As a result, a TRIP could now be in retirement phase if the member satisfied any condition of release with a "nil" cashing restriction.

A member could now notify their superannuation income stream provider that they have satisfied a condition of release with a nil cashing restriction, other than the condition related to attaining age 65. These other conditions of release with a nil cashing restriction are

  • retirement,
  • terminal medical conditions, and
  • permanent incapacity.

Which meant that once the member reached 65 years, there was no need to notify the trustee that a condition of release has been met (assuming the trustee is aware of that event), however, in all other three conditions of release, the member had to notify the trustee to convert their TRIP to a simple ABP and move their Pension to "Retirement Phase" and enjoy the tax free status as long as the balance was below $1.6M. Any amounts above the $1.6M were supposed to be moved out of the TRIP via a partial commutation to an accumulation account.

For clarity of any doubt if retirement happened on any other day other than 30th June - the trustee was to bring all TRIP assets to market value and credit un-realized gain to the member account before partially commuting the pension, so that the correct amount could be credited to the TBA and reported to ATO.

This new legislation also stipulated that as a superannuation income stream that is established as a TRIP will always retain its character as a TRIP. The restriction introduced earlier was to prevent TRIP from being in the retirement phase even after the holder later satisfies a condition of release with a nil cashing restriction.

This new rule meant that if a member who was on TRIP and later met a condition of release with a nil cashing restriction and who wishes to take advantage of the earnings tax exemptions available in respect of superannuation income streams does not any more need to commute and rollover their TRIP benefits to an accumulation account and then commence an account-based pension (. The law introduced in June 2017, allowed TRIP to move to retirement phase automatically when the member reached age 65 or the TRIP could move to retirement phase if the member informed the trustee in other cases mentioned above. The result of this legislation was to remove the need to commute a TRIP and commence an ABP.

 

What is this "Hu Ha" about death benefits?

When the rules were changed in June 2017, it did not include another condition of release with Nil cashing restriction - "DEATH".

"What happens to superannuation interest of a member who is on TRIP?"

Cashing rule from 1st July 2017 state that death benefit can only be paid as a lump sum or as a pension that are in retirement phase (Regulation 6.21 of SISR) and since TRIP was not included in retirement phase, paying a reversionary pension of a member who died while he was on TRIP depended on the beneficiaries situation. The trustee had to check if the beneficiary is in "Retirement Phase" or not (See Section 307-80(3) of ITAA).

In other words a death benefit pension of a member on TRIP could be paid only to those beneficiaries who were either retired or had a terminal medical conditions or were permanent incapacitated or were over age 65.

In a normal Account Based Pension reversionary pensions generally continue on the death of the original pension member because ABP's are in retirement phase, but in a TRIP situation, because members are NOT in retirement phase, upon death, pension could only be paid to a beneficiary only if the beneficiary had met one of the conditions of release and if they had not met any condition of release, they could not receive a reversionary TRIP.

This technically meant that a reversionary nomination of TRIP would be invalid as the trustee were not permitted to continue to pay the pension under the death benefit rules without checking the status of the beneficiary and if the beneficiary did not meet any condition of release, they could only receive a lump sum paid out of the superannuation system.

 


A D V E R T I S E M E N T

 

 

 

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Why did I answer "Yes, beneficiary can be paid a death benefit of a member on TRIP"

As the law stands today, if a reversionary TRIP fails then the trustee must look at the trust deed to seek guidance on how the death benefit has to be paid. Most trust deeds allow trustee discretion where the trustee can pay a death benefit pension to a tax beneficiary (dependent of the member). This "New" death benefit pension is in "retirement phase" death benefit income stream, however please note that this pension is not an automatic reversionary pension.

The new death benefit pension credits the TBA of the beneficiary (say spouse) on the date of death of the original deceased pensioner, however an automatic reversionary pension credits the TBA of the beneficiary 12 months after date of death of the pensioner to allow the beneficiary to sort out their affairs.

It is important to understand that if the reversionary clause of a TRIP is invalid, then the fund's trust deed takes precedence on how a death benefit of a deceased member has to be paid and advisor must be careful that there are no binding death benefits in favour of previous spouses or to other dependents which must be honoured.

Further, if the person the deceased member nominated as a reversionary beneficiary is also the surviving trustee, then that may be fine because the surviving trustee can then make the decision to pay the death benefit to themselves as a death benefit account based pension, however, where the TRIP reversionary is not a trustee of the fund, the trustee could exercise their discretion to pay the death benefit to the member’s other SIS dependant beneficiaries.

 

Conclusion

Till the new bill (Treasury laws amendment Bill 2018) is passed, it is important for fund members with reversionary TRIP income streams to review their estate planning arrangements and to update them where required. One such option can be to revoke a reversionary nomination and replace it with a binding death benefit nomination where the person nominated as a reversionary hasn’t satisfied one of the specified conditions of release or ensure that the beneficiary is in control of the fund after death.

If the pensioner has met a condition of release, the last alternative is that the member stops TRIP on the day of meeting a condition of release and restart a simple account based pension (which may come at a cost) with a reversionary beneficiary. SMSF trustees should seek legal advice to obtain the desired outcome.

Once the legislation passes through parliament, reversionary transition-to-retirement income streams (TRIP) will be allowed to automatically transfer to eligible dependants upon the death of the primary recipient and will align a reversionary TRIP with simple account-based pensions with 12 month delay for the transfer balance credit to occur on the death of a pensioner, giving the beneficiary the necessary time to get their affairs in order.

If legislated, the measure will apply to reversionary TRIP's from 1 July 2017.

- Manoj Abichandani

SMSF Specialist

 

Disclaimer - Information above is for educational purposes and is not legal advice.

 


 

 

 

 

Learn how to Audit in less than half time 

CPD Hours : 6 Hrs in SMSF & Audit

Integrate your website to ours and future proof your business - 2 Seats are left for 22nd Feb 2018

Seminar : Let us show you... How to reduce SMSF Audit time in half! - 6 CPD hours in SMSF Audit
Venue : Suite 3.04, Level 3, 29-31 Solent Circuit Baulkham Hills NSW 2153
Date : 22 Feb  2018 Thursday
Timings : 09:30 am to 03:30 pm

Cost: The fee for seminar is $165Incl. GST and is tax deductible(Plus Travel). Includes 10 audits worth $187 Incl. GST

Let us show you...

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Proposed Agenda

09.00 AM  Registration - Arrival Tea and Coffee

09.30 AM  Introduction to Audit Online on SMSF Audit Software and Website integration

11.00 AM  Tea/Coffee Break

11:30 AM How can the accountant and trustee interact with the software

01:00 PM Lunch 

02.00 PM  How to complete an audit in half the time

03.30 PM  Workshop Closed

 

Introduction/Overview

SMSF Auditors spend too much time in financial audit and completing manual audit working papers, our online software does most of this work automatically & saves half your time as compared to traditional auditing methods.

It checks closing share prices, dividends received from ASX and all mundane tasks of signing, scanning & mailing of audit report, Mgt. letter, engagement letter, Invoice & contravention reports etc. are automated with one click of a mouse. Embrace an efficient framework for high quality audits and conduct audits on a flawless workflow Management system.

Achieve peace of mind & confidence of knowing that you are using a completely up-to-date online checklist and cloud process to deliver a robust, hassle free top quality SMSF audit. Improve communication with accountants & trustees. Manage 20 or 2000 audits by streamlining workflow from our smart Audit Manager & establish seamless communication between all parties. Our online SMSF audit system is the only tool which can deliver reliability, speed and volume and ultimately profits for your business at a fraction of the cost.

Benefits/learning outcomes

Audit from anywhere, anytime from any device on your own website or by integrating with ours. Increase audit effectiveness, add value, reduce audit risk, drive SMSF compliance, revolutionise your business.

Included in the fee is an account to audit 10 SMSF on the online platform worth $187 and Lunch. Those auditors who are already using the online software will benefit by learning new shortcuts and other advanced features of the online software. 

Recommended For

All SMSF ASIC approved auditors.

Session Notes

CPD Hours

6 CPD hours under self assessment method under RG 243.88 - 90 for Audit of SMSF. This activity has been accredited for continuing professional development by the Financial Planning Association of Australia but does not constitute FPA’s endorsement of the activity. Accreditation number 008743 for 6 hours. 

Attendee Requirements

Attendees may bring their own Laptops / Ipads for a better understanding - although some attendees may get more from the workshop by looking at the facilitators screen 

Speaker

Mr Manoj Abichandani: Manoj has worked in SMSF since 1988 and is SMSF Specialist (UNSW) and ASIC approved auditor. He was providing high level advisory services to over 600 funds in his own 3 partner CPA tax practice for 19 years and has written this online software. He currently works as SMSF Technical Support Team Leader at www.trustdeed.com.au He has hands on knowledge on what happens in a tax practice on high level of SMSF practical issues. 

 
 
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