Many people who haven't consulted a planner or delved into the newsletters from their superannuation funds might think they can only access their superannuation upon actual retirement. However, there are numerous other circumstances that could trigger a crucial “Condition of Release” and make your retirement funds available. In this guide for SMSF trustees, I'll focus on meeting the Retirement Condition of Release, but you can explore the other conditions of release here (click it later).
Acknowledgement: I have relied on the excellent guidance of the AMP TAPin team for most of the content in this article. They write fantastic technical articles for advisors, and I aim to make them SMSF trustee-friendly.
What is the Retirement Condition of Release?
The retirement condition of release often comes with complexity and uncertainty. However, understanding the rules became even more critical after 1 July 2017 due to the 2016 Budget measures. The tax exemption on investment earnings supporting a Transition to Retirement Income Stream - Accumulation Phase (TRIS – Accumulation) is no longer available. However, a TRIS will regain its tax-exempt status once the ‘retirement’ condition of release is satisfied, transforming it into a Transition to Retirement Income Stream - Retirement Phase (TRIS – Retirement Phase). Therefore, understanding what constitutes ‘retirement’ for an SMSF member in a TRIS is essential to achieve that holy grail of a tax-free retirement pension.
Conditions of Release – Overview
Death is the only condition of release that requires compulsory cashing of benefits. Under any other condition of release, there is no requirement to either cash out a benefit or commence an income stream from your SMSF, and member accounts can remain in the accumulation phase indefinitely.
If you leave your member account in the accumulation phase, it will be subject to an income tax rate of up to 15%, instead of a 0% tax rate for investments backing a pension income stream. There is also now a $1.9m limit on how much can be transferred into an income stream, with people who already had some money in the pension phase having a pro-rata limit of between $1.6m and $1.9m. You can check this on MyGov > ATO service > Super Tab > Information to see your limit.
The most common conditions of release to access your account are:
Reaching preservation age of 60 and retiring.
Transitioning to retirement (after attaining preservation age): SMSF members who are under 65 and have reached preservation age but remain gainfully employed on a full-time or part-time basis may access their benefits as a non-commutable income stream called a Transition to Retirement Income Stream - Accumulation Phase (TRIS – Accumulation Phase). However, from 1 July 2017, that income stream will not be tax-exempt until you meet a further Retirement Condition of Release.
Reaching age 65: A member who is 65 years old may access their benefits anytime without restrictions.
Retirement Condition of Release
For superannuation purposes, a member’s retirement depends on their age and future employment intentions. A person cannot access superannuation benefits under the retirement condition of release until they reach preservation age. Once you reach your preservation age, the definition of retirement depends on whether the person has reached age 60.
If a person has never been gainfully employed in their life, they cannot use the retirement condition of release to access their Preserved Benefits. Such a person would need to satisfy another condition of release to access their benefits (e.g., reaching age 65, invalidity, terminal illness, severe financial hardship).
Age 60 but Less Than 65
When a person has reached age 60, retirement occurs when an arrangement under which the person was gainfully employed has ceased on or after the person reached age 60. It does not matter that the person may intend to return to the workforce. This condition presents an opportunity for many people to move a taxed pension to a tax-exempt phase earlier.
Example: Reaching Age 60
Rachel has worked as a GP for many years. She resigns from this employment on her 61st birthday. Three months later, Rachel takes up a 3-day position as a Cancer specialist. Because Rachel has ceased employment as a GP after her 60th birthday, she can access all her superannuation accumulated up until that point.
Situations sometimes arise where a person, aged 60 or over, is in two or more employment arrangements at the same time. According to APRA Prudential Practice Guide SPG 280, the cessation of one of the employment arrangements is the condition of release in respect of all preserved benefits accumulated up until that time. The occurrence of the ‘retirement’ condition of release in these circumstances will not enable the cashing of any benefits which accrue after the condition of release has occurred. A person will not be able to cash those benefits until another condition of release occurs (e.g., they also leave their second employer).
Example: Two Employment Arrangements
David (age 63) works part-time as a school Substitute Teacher. During the school holidays, he had a short-term six-week contract to work as a Census form collector. The contract finished in September 2022.
Because Frank has ceased one of his employment arrangements, he can access all his superannuation up until that point. However, any later contributions made (employer and personal contributions) and earnings will be preserved.
Director and Employee of Own Company
Sometimes a person is both an employee and director of their own company. They may wish to cease their employment duties with the company but retain their directorship. The question arises as to whether such a person (age 60 – 64) can access their preserved superannuation benefits.
If a person is engaged in more than one arrangement of employment, the person can cease any arrangement of employment to meet the ‘age 60’ definition of retirement.
Therefore, as long as a person’s two roles are separate and they terminate in their capacity as an employee of the company, then even though they are still employed in the capacity as director, that person can access their preserved superannuation entitlements.
**Note that there must be a distinct termination, i.e., cessation of all duties as an employee, and the person should now only operate in the capacity as a director for the company.**
We see this a lot where often a spouse has helped out for years, but as the children join the business or the business matures, the requirement for the spouse to continue turning up day-to-day reduces. They can step away from the duties as an employee but may still handle the liaison with the tax agent on the financials, ASIC regarding company registration, and the ATO to pay tax instalments, which are more akin to Directors Duties.
When is a Person Gainfully Employed?
Someone is said to be ‘gainfully employed’, for superannuation purposes, where they are employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation, or employment.
Gainful employment can either be on a part-time or full-time basis.
Part-time means at least 10 hours per week and less than 30 hours per week.
Full-time means at least 30 hours per week.
The definition of gainful employment involves two clear components:
Employment or self-employment, and
Gain or reward.
The term employee is not specifically defined in the SIS Act for this purpose; its common law meaning must be considered. One definition of employee is ‘a person in the service of another under any contract of hire (whether the contract was expressed or implied, oral or written), where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed’.
In contrast, self-employed individuals work for themselves rather than for an employer, earning income from a trade, profession, or business they personally operate. Typically, someone who claims to be self-employed would be running their own business (e.g., having a business plan, financial records, an ABN, regular and frequent business activities, advertising, etc.).
Superannuation legislation doesn't define what 'running a business' entails, but taxation law does. Specifically, paragraph 13 of Tax Ruling 97/11 outlines relevant indicators of running a business:
Significant commercial purpose or character
More than just an intention to engage in business
Purpose and prospect of profit
Repetition and regularity of the activity
Similarity to ordinary trade in that line of business
Planned, organized, and business-like manner aimed at making a profit
Size, scale, and permanency of the activity
Distinction from a hobby, recreation, or sporting activity
'Gain' or 'reward' isn't defined in superannuation legislation, so we rely on their ordinary meanings. According to the Macquarie Dictionary, 'gain' means 'to get an increase, addition, or profit,' and 'reward' is 'something given or received in return for service, merit, hardship, etc.'
To satisfy the gainful employment definition, the service, merit, or hardship must be completed with some expectation of an increase, addition, or profit. There must be a direct link (or nexus) between the activity undertaken and the reward provided. The actual level of gain or reward doesn't have to match the level of effort or activity. So, even a small reward can suffice, as long as there's a direct link to the activity. The reward doesn't have to be cash; it could be services, fringe benefits, or other valuable considerations.
The gain or reward element is typically difficult to satisfy in the case of charity or volunteer work. Non-paid work for a charity, for example, wouldn't qualify as gainful employment.
Mere reimbursement of expenses doesn't constitute gain or reward.
As discussed earlier, gainful employment for superannuation purposes requires an individual to be either employed or self-employed. Most charities or volunteer organizations don't consider their charity or volunteer workers to be employees.
Transition to Retirement Pensions – Impacts of Meeting Retirement Condition of Release
The Transition to Retirement Income Stream (TRIS) condition of release allows a member to access their superannuation as a non-commutable income stream once they reach preservation age, called a Transition to Retirement Income Stream - Accumulation Phase (TRIS – Accumulation Phase). A non-commutable income stream for TRIS purposes is subject to a maximum annual drawdown of 10% per annum. Preserved Benefits can't be accessed through a TRIS as a lump sum until it meets the new “Pension phase” position.
From 1 July 2017, the tax exemption on investment earnings supporting a TRIS – Accumulation Phase is no longer available.
The actual income stream (pension payments) will still be tax-free after 60. However, a TRIS will regain its tax-exempt status once the ‘retirement’ condition of release is satisfied, for example, if the individual terminates employment at any stage on or after age 60. It's a fairly simple process to confirm to your Pension provider that you have met that further condition of release, and they may automatically move you to Transition to Retirement Income Stream - Retirement Phase (TRIS – Retirement Phase) at 65 anyway, but it's worth confirming with them in writing.
It's vital for SMSF trustees to immediately contact their Accountant/Administrator should the member retire permanently from the workforce or terminate employment on or after age 60. When the administrator is notified that a no cashing restriction condition of release occurs (e.g., retirement), the balance of the TRIS account (at that stage) will be converted to a Retirement phase account-based pension (ABP), and the tax exemption on earnings will apply. However, it will then also count towards the individual’s $1.6 – $1.9 million pension transfer balance cap and needs to be reported to the ATO within the new reporting guidelines.
Reaching age 65 will automatically result in a TRIS pension becoming a Transition to Retirement Income Stream - Retirement Phase (TRIS – Retirement Phase) and obtaining tax exemption on earnings, if within the individual’s $1.6-$1.9 million pension transfer balance cap.
Evidencing Cessation of Gainful Employment
The cessation must be genuine. Genuine terminations of employment typically involve the payment of accrued benefits, such as annual and long service leave. SMSF trustees should retain written evidence of the member’s cessation of gainful employment on file and copy it to the administrator so the fund auditor has access.
Penalties apply to members, trustees, and those who promote ‘illegal early access schemes’ to improperly access superannuation prior to meeting a condition of release.
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