With Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 finally passing the Senate late in 2018, it required further amendments to be passed by the House of Representatives before this ‘fix’ would apply to allow for certain reversionary pensions to continue or move into the retirement phase. Importantly, we have now seen this legislation on 12 February 2019 pass both houses and will now receive Royal Assent.

TRIS Measures

Super reform measures from 1 July 2017 restricted the tax treatment of Transition to Retirement Income Streams (TRISs) to move into the retirement phase only when a member has satisfied a condition of release with a nil cashing restriction as outlined within section 307-80(3) of the ITAA 1997.

Once a TRIS commences, it retains its character as a TRIS even after the recipient satisfies a general condition of release. On the death of a recipient, a TRIS can only revert to a dependant beneficiary who satisfies a condition of release. This is because a member’s superannuation interests can only be paid as a superannuation income stream if the income stream is in the retirement phase and paid to a dependant beneficiary (refer to regulation 6.21 of the SIS Regs for the rules about compulsory cashing of benefits on death).

While most superannuation income streams are in the retirement phase when superannuation income stream benefits are paid from the interest, a TRIS also requires that the person that receives the payment, including a reversionary beneficiary, satisfies a condition of release (see subsection 307-80(3) for the rules about when a TRIS is in the retirement phase).

However, even where a reversionary TRIS currently cannot be paid for that reason, a deceased member’s superannuation interests can still be paid to a dependant beneficiary as a new income stream without them satisfying a condition of release in their own right. This can occur when an existing income stream (including a TRIS) ceases on death and the underlying interests are paid out as a new income stream.

The inability for a TRIS to automatically revert in this situation has resulted in administrative difficulties for a fund and potentially requires recently bereaved dependant beneficiaries to engage with their superannuation quickly.

What the amendment fixes

As a result, the amendments made by Government modify the rules that determine when a TRIS is in the retirement phase to ensure that a reversionary TRIS can always be paid to a reversionary beneficiary (by inserting paragraph 307-80(3)(aa)).

The change will allow the original TRIS to be paid to the dependant beneficiary rather than having to be commuted and a new income stream started from the deceased member’s underlying superannuation interests. This approach is consistent with the treatment of other superannuation income streams, which do not require the reversionary beneficiary to satisfy a condition of release.

A reversionary beneficiary is a beneficiary who receives a benefit from a superannuation income stream that continues to be paid after the death of the primary beneficiary (that is, the income stream does not cease on death). The term ‘reversionary beneficiary’ takes on its ordinary meaning, consistent with the approach in other provisions (such as the transfer balance cap ‘credit’ rules in item 1 in the table to subsection 294-25(1)).

Although covered explicitly by the amendments, a reversionary TRIS can only be paid to a reversionary beneficiary who is also a dependant beneficiary of the deceased. This additional requirement arises because of the compulsory cashing rules in regulation 6.21 of the SIS Regs, which restricts the payment of a deceased member’s superannuation interests through a pension or an annuity to dependant beneficiaries.

This change applies in the same way as any provision that refers to the retirement phase definition applies.

In practice, the amendment largely applies from 1 July 2017, being the time from which the retirement phase definition generally became relevant. The retrospective application of the amendment is appropriate as it is wholly beneficial to super funds and reversionary beneficiaries, who will have a greater range of options in dealing with the superannuation interests of deceased members.

To understand the impact of this change further, consider the following example:

Example:

Geoff (60) was in receipt of a TRIS (not in RP) at the time of his death on 8 October 2017. He had nominated his spouse, Jenny (58) as the reversionary beneficiary. Jenny works full-time and has not satisfied a condition of release with a nil cashing restriction. Under the current rules, as Jenny has not satisfied a cashing condition within section 307-80(3) of the ITAA 1997 for the income stream to be in the retirement phase (death is not a cashing condition within the ITAA 1997), the pension must cease upon death (as SIS Reg. 6.21(2)(b) is not satisfied).

As a result of these amendments, as Jenny is nominated and automatically entitled as a reversionary beneficiary, the insertion of paragraph 307.80(3)(aa) into the ITAA 1997 will allow for this pension to continue.