For The Over 60s, A Key Super Pension Rule Works In Their Favour

Sometimes the super rules can almost be too simple. A case in point is a rule that will allow older Australians to continue to hold a tax-free pension, despite the forthcoming changes to transition to retirement arrangements.

From July, transition to retirement income streams (TRISs) will lose their entitlement to tax-exempt investment earnings. They will still be permitted as tax- friendly income streams that allow you to access your super from the age of 56, assuming a number of conditions are met.

Importantly, tax will need to be paid on investment earnings generated by the fund. Earnings include share dividends and capital gains, interest and any rental income and property capital gains, with tax paid at a concessional rate of 15 per on income and 10 per on capital gains.

One way a TRIS can retain these concessions, which this column has previously assessed as being worth between 0.5 per cent and 2 per cent, where investment returns range between 3 per cent and 12 per cent, is where the TRIS is converted to an account-based pension because a member has satisfied what is known as a condition of release.

A condition of release is a rule that allows you to access your super savings as either an income stream or a lump-sum benefit. Whereas the most common condition is retirement from work, there is another more subtle condition: retirement from gainful employment after the age of 60. The subtle aspects of this condition is illustrated by how three different facets can be interpreted: namely retirement, gainful employment and "after the age of 60".

Whereas most people might regard retirement as ending their working life, "retirement from gainful employment after the age of 60" actually means ceasing a particular job after a 60th birthday, but not necessarily retiring from all work.

This more subtle definition is relevant in the case of a reader who asks whether it is possible for a self-managed super fund member to retire from a minor job – he nominates working for the electoral office for just one week – and whether this cessation of employment could entitle him to convert his existing TRIS, which was funded by his main job where he still works, to an account-based pension and so retain an entitlement to tax exempt investment earnings from July 1?

According to super lawyer Daniel Butler, of DBA Lawyers in Melbourne, super law only requires an arrangement of gainful employment to come to an end after attaining the age of 60. Ceasing a minor job, provided that job stacks up to scrutiny, would be sufficient to satisfy the gainful employment requirement after the age of 60.

What does "stack up to scrutiny mean?" Could it be a one week position with the electoral office the reader describes?

It could, says Butler, because the law that defines gainful employment does not talk about how long the period of employment needs to be. He can't see a problem if the term is just one week. It could even be less.

A valid employment contract would be required, which should be easy enough where a recognised third party employer is involved.

Such a contract is likely to describe the terms and conditions of employment, as well as how much the staffer will be paid. If the reader worked for the electoral commission as a polling booth official, for instance, that should satisfy the gainful employment test. Other employment arrangements that ended after age 60 should also be able to satisfy the condition of release, says Butler, such as working as a Uber driver.

Where an SMSF member wanted to be sure their employment arrangement satisfied a condition of release, they could always run it past an expert. A specialist lawyer should be able to provide a written opinion that confirms the validity of a condition of release. Asking the Australian Taxation Office for an opinion is another course of action. Another specialist worth consulting is the auditor.

Chris Makin, a senior consulting auditor with Baumgartner Super, agrees if the reader is over 60 at the time of ceasing employment from the electoral office – even though they have another main job – an existing TRIS account can be converted into an account-based pension. This will mean his fund will remain eligible to claim tax-exempt pension income from July.

Jemma Sanderson, a director of Perth-based supera advisers Cooper Partners, says while ceasing an employment arrangement once over age 60 is sufficient to satisfy a condition of release that will allow a TRIS to become an investment earnings tax exempt account based pension, such an arrangement will need to be formally documented. It can't be assumed a TRIS will automatically convert to an account based pension just because a member has satisfied a condition of release, such as turning 60.

Whether a TRIS can automatically be converted to an account based pension is a topical issue among self-managed super funds. I addressed this in a previous column ( Alarm bells on switching TTR pensions to account based pension, Weekend AFR March 2) . It is still a matter awaiting Taxation Office attention.

What is also significant about the age 60 condition of release, says Sanderson, is that this entitlement will continue to be available for those with a TRIS beyond July 1.

Where someone satisfies a condition of release, they will need to be aware that starting a tax exempt account based pension from July means they will need to abide by the $1.6 million limit that will be placed on tax-free super pensions - and all the associated implications of the new ceiling.

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