Many Australians are concerned about the proposed additional tax on super balances over $3 million and are looking for strategies to keep their balance below this threshold. Staying below the threshold requires taking money out of super, which can be done after meeting a condition of release such as reaching preservation age and retiring or attaining age 65.
What about those who are yet to meet a condition of release? Are their options limited until they retire or attain age 65? Not necessarily. After reaching preservation age, a Transition to Retirement Income Stream (TRIS), can allow a member to withdraw an income stream from their superannuation balance before they retire. Preservation age is the age at which you can access superannuation and depends on when you were born. It was age 55 for those born before 1 July 1960 and has gradually increased to age 60 for those born after 1 July 1964.
How a TRIS works
A TRIS allows members to gradually move toward retirement by accessing a limited amount of their super balance before they cease work. The member must satisfy their minimum annual pension requirement but cannot withdraw more than 10% of their TRIS balance in one financial year.
Drawing a TRIS becomes most tax effective after the age of 60, when the income stream payments become tax free to the member.
There is no upper limit for a TRIS unlike the transfer balance cap, which limits the amount a member can have in a pension account to $1.9 million after meeting a condition of release. Note, the TRIS does not count toward a members transfer balance cap until they enter retirement or attain age 65, whichever comes first.
Take the example of John who is 62 and has a total super balance of $3.2 million. If John were to commence a TRIS with his full balance, he could withdraw up to $320k from his super balance in one financial year tax free.
A drawback of the TRIS, and reason why this strategy is not as popular as it once was, is that earnings on the assets supporting the TRIS balance do not receive the same tax-free treatment as earnings on a pension balance. Instead, income is taxed at the standard rate of 15 per cent, with capital gains taxed at 10 per cent as is the case during accumulation phase.
Why would a TRIS strategy be considered?
A TRIS allows those yet to meet a condition of release to withdraw amounts from their super from preservation age which is now 60 for most people. This could benefit those between the ages of 60 and 65, who are yet to retire and wish to access to their super balance.
It could also be a way to reduce an individuals total super balance, giving them the opportunity to equalise super amounts between spouses or transition wealth above $3 million into other investment structures.
The proposed legislation to introduce the Division 296 tax on super balances over $3 million is yet to be passed, and there is now some doubt over whether it will pass the Senate. If passed, the legislation would come into effect from 1 July 2025, meaning a members total super balance would only be assessed at 30 June 2026. So, there is time to seek advice and consider the available options before making any changes to your superannuation strategy.
Lindzi Caputo is a financial adviser of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052) ABN 65 106 772 696. This article contains general advice which does not consider your particular circumstances. You should seek advice from HLB Mann Judd Wealth Management (NSW) who can consider if the strategies and products are right for you.