SMSF Alert: August 2015

The Budget saw the beginning of the preservation age being slowly raised, which immediately affects anyone planning to take advantage of the transition to retirement income stream strategy. Also, be aware the ATO is taking a close took at income from discretionary trusts.

Key Points

  • The preservation age has risen, so don’t be caught out
  • Transition to retirement a boon for older workers
  • Discretionary trust income in the spotlight

When to transition – the preservation age is on the rise

Self-managed super fund members who are keen to take advantage of the transition to retirement strategy need to be aware the age at which the strategy can be commenced is on the rise.

A fund member must have reached the preservation age before the self-managed super fund of which he or she is a member can pay a transition to retirement income stream, unless another condition of release has been satisfied.

From July 1, the legislated increase in the preservation age announced in the May Budget took effect.

The changes will see the preservation age increase from 55 to 60 in two-year steps over the next 10 years.

Any member who had turned 55 before July 1 this year is eligible for the transition to retirement income stream strategy, but a member who turns 55 this financial year will have to wait until after July 1 2016 before qualifying.

The Tax Office has issued a timeline which shows eligibility for the transition to retirement strategy by date of birth, as follows:

  • If born between 1 July 1960 and 30 June 1961 the strategy can be commenced during the 2016-17 financial year, when the member is 56.
  • If born between 1 July 1961 and 30 June 1962 the strategy can be commenced during the 2018-19 financial year, when the member is 57.
  • If born between 1 July 1962 and 30 June 1963 the strategy can be commenced during the 2020-21 financial year, when the member is 58.
  • If born between 1 July 1963 and 30 June 1964 the strategy can be commenced during the 2022-23 financial year, when the member is 59.
  • Anyone born after July 1 1964 can commence the strategy in the 2024-25 financial year, by which time they’ll be 60.

The transition to retirement income stream strategy is a very effective way for older workers to maximise the tax benefits of superannuation.

The strategy is straightforward. Once a worker has reached the preservation age, he or she can draw a tax-free pension from super at the minimum drawdown level, currently 4%, while at the same time salary sacrificing into super up to the maximum level.

In this way, personal income tax is minimised and earnings on savings in super are tax-free.

ATO eyes discretionary trust distributions

The Tax Office is on the lookout for distributions from discretionary trusts and will review the lodged returns of self-managed super funds where income from such trusts has been declared.

As indicated by the name, a discretionary trust relies on the ‘discretion’ of the trustee to determine distributable income levels.

In a previous review the ATO asked to check trust deeds of distributing trusts. It is looking at gross trust distributions to catch any income which could be considered ‘non-arm’s length income’, and which it considers should then be taxed at the highest marginal rate.

These amounts should be reported at Section B: Income, label U2 on the SMSF annual return, the ATO says.

If distributions from discretionary trusts are reported correctly in annual returns, there shouldn’t be any problem, the Tax Office reckons.

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