Superannuation Reform: Transition to Retirement Pension (TRAP)

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A Transition to Retirement Pension (TRAP) is an income stream that you receive from your SMSF when you are aged between Preservation Age and 64 and NOT "Retired". It enables individuals to gradually move to retirement by accessing a limited amount of super.

TRAP Commenced prior to 01 July 2017 and the member retires or turns to age 65 prior to 01 July 2017

The Transition to Retirement Pension (TRAP) documentation prepared by ESUPERFUND contains a "Converting from TRAP to SABP Minutes" which states that the existing Transition to Retirement Pension (TRAP) will automatically convert to a Simple Account Based Pension (SABP) on the day you retire from the workforce or your 65th birthday, whichever is earlier.

1. Convert your TRAP to SABP on 65th Birthday

In this case, the conversion will take place automatically as soon as you turn age 65 and no document is required to trigger the conversion. You can continue to work beyond age 65 and your pension will remain as an SABP.

2. Convert your TRAP to SABP on the Retirement Date

In this case, you must meet the definition of "Retirement" and sign a “Retirement Declaration” to trigger the conversion. The definition will vary depending on when you cease work.

If you cease employment between Preservation Age and 59, "Retirement" means that at the time you ceased employment you never intended to work again either on a full-time or part-time basis (defined as more than 10 hours per week). A "Retirement" Declaration must be signed if you cease employment between Preservation Age and 59 and can be found here.

If you cease employment after age 60, "Retirement" means you simply cease your employment. In this case the intention to return to the workforce is irrelevant. The definition of retirement in this case is less stringent than for those under 60. A "Retirement" Declaration must be signed if you cease employment after age 60 and can be found here.

Importantly your retirement must be “real” in order to convert your TRAP to SABP (e.g. reducing your working hours with the same employer without actually ceasing your employment would not meet the definition of "Retirement" discussed above).

As soon as you retire from the workforce and you are satisfied that the definition of "Retirement" can be met, please complete, sign and forward a copy of your “Retirement Declaration” to ESUPERFUND.

If your TRAP converts to SABP prior to 01 July 2017, the TRAP reform discussed below does not apply to you. Further details on how the superannuation reforms affect SABPs can be found here.

Superannuation Reform – Removal of Tax Exemption benefits

Transition to Retirement Pensions (TRAP) are currently available to assist individuals to gradually move to retirement by accessing a limited amount of super. Currently, individuals receiving a TRAP receive tax-free earnings on the super assets that support it.

From 01 July 2017 the tax exemption on earnings from assets supporting Transition to Retirement Pensions (TRAP) will be removed. These earnings will instead be taxed concessionally at a rate of up to 15%, which is taxed in a similar way as Accumulation accounts. This change will apply irrespective of when the transition to retirement pension commenced.

Please see the table below summarising tax rates associated with TRAPs.

Tax Rates for TRAP Account Before After
(from 01 July 2017)
Income Tax Free 15%
Capital Gains
(Asset Owned Under 12 Months)
Tax Free 15%
Capital Gains
(Asset Owned Over 12 Months)
Tax Free 10%
Pension withdrawals
(Age 60 or over)
Tax Free Tax Free (No change)
Pension withdrawals
(Preservation Age to 59)
Click Here Click Here

Transitional CGT Relief

Where individuals have a Transition to Retirement Pension (TRAP), earnings on assets supporting the TRAP will become taxable from 01 July 2017. The purpose of the CGT relief provisions is to provide temporary CGT relief for accumulated capital gains on assets which would have been exempt but for the introduction of the TRAP earnings taxation measure. The relief will ensure that CGT is only payable (on the sale of these assets after 1 July 2017) on capital gains accrued from 1 July 2017.

The CGT relief is not automatic and the SMSF needs satisfy to a set of conditions through self-assessment before CGT relief can be elected. E.g. The relief only applies to assets acquired by the Fund prior to 9 November 2016 and continued to be held by the Fund until 30 June 2017.

Provided your SMSF is eligible for the CGT Relief, you can apply it on an asset-by-asset basis. The chosen asset is deemed to have been sold and re-purchased back immediately on the same day (i.e. on 30 June 2017) in the accounting records of the SMSF. Physically the asset is owned by the SMSF without any transfer of ownership.

Where an asset is already partially supporting an accumulation account, the fund will need to pay tax on the proportion of capital gains made prior to 01 July 2017 that is attributable to the accumulation account. The tax on this notional gain can be paid in the 2016/17 income tax return or deferred until the asset is sold.

The choice is to be made by notifying the Commissioner of Taxation (i.e. ATO) in the approved form on or before the date the fund is required to lodge its 2016-17 income tax return. Once lodged, the choice is irrevocable. At the time of writing, the "approved form" has not been released by the ATO yet.

The above information only provides a brief overview of the Transitional CGT Relief. Please click here for detailed explanation and some worked examples.

Implications of the Reform

From 01 July 2017 earnings on assets supporting the TRAP will become taxable. In addition, personal tax is also payable on the "Taxable" portion of your Pension Withdrawals if you are aged between Preservation and 59

Considering the above, commencing a TRAP might no longer be beneficial to individuals from 01 July 2017.

Benefits of commencing TRAPs

  • Individuals are able to access super benefits from the SMSF (subject to the annual Minimum and Maximum requirements) to meet their living expenses.

Drawbacks of commencing TRAPs

  • Annual compulsory withdrawals must be made to comply with the SIS payment standards.
  • Tax is payable on the "Taxable" portion of Pension Withdrawals if withdrawals are accessed between Preservation age and 59
  • Super benefits accessed might not be able to be returned to SMSF due to the reduced contributions cap
  • More paperwork is involved

Commutation of Transition to Retirement Pensions (TRAP)

If you decide to fully commute (i.e. cease) your TRAP on 30 June 2017, please contact ESUEPRFUND by email at info@esuperfund.com.au. Please note that once your TRAP is ceased, you cannot make any pension withdrawals from your SMSF.

The pension commutation represents an accounting entry only and no action is required from you apart from signing the associated pension commutation documentation.

You can recommence a pension later by simply submitting a pension application via your client portal. The pension type (i.e. TRAP / SABP) will be re-determined based on your age and retirement status as at the new pension commencement date.

This service is absolutely FREE!  This is unprecedented in today's market.

Seek Professional Advice from a Financial Adviser

ESUPERFUND is a no advice model and does not provide financial advice to clients. We recommend that you seek professional advice from a financial adviser. A licensed financial adviser will consider your personal situation and make a recommendation suitable to your particular financial needs.

It should always be remembered that Trustees are legally responsible for all the decisions made even if you obtain advice from a Financial Planner. Whilst a Financial Professional can provide advice and assistance you are ultimately responsible for the Fund.