Since 1 July 2005, the Government introduced an additional condition of release to allow people who have reached their preservation age to access their superannuation benefits through a non-commutable income stream (or transition to retirement income stream).

How does it work?

A transition to retirement income stream is commonly used with a salary sacrifice arrangement. People are able to sacrifice their salary into superannuation and supplement their income by withdrawing money from their superannuation fund as an income stream.

From 1 July 2007, withdrawals from a complying superannuation fund for people aged 60 and over will be tax free. This increases the tax effectiveness of the strategy for people who continue to work after age 60. Contributions to the fund are taxed at the concessional rate of 15% rather than a person’s marginal tax rate and pension income drawn from the fund will be tax free.

For people aged 55 to 59, the transition to retirement strategy is still tax effective as the taxable pension income drawn from superannuation attracts the 15% pension tax offset.

The concessional contribution cap will impact people using a transition to retirement income stream/salary sacrifice strategy. There is also the disincentive of salary sacrificing amounts above the cap, as excessive contributions are taxed at 46.5% (instead of 15%) and count towards the non-concessional contribution cap.

Under the new pension standards, a transition to retirement income stream will have a minimum and maximum pension payment. From 1 July 2007, the income stream will need to pay a minimum pension payment of 4% of the total purchase price of the pension and a maximum of 10% per year. If an individual is looking to commence this strategy and to maintain their net income position, this could potentially limit the amount of income that an individual can withdraw. The amount an individual can draw will be limited by the thresholds and the amount of capital they have, as the payments are based as a percentage of the total fund balance.

How much tax do I save?

Table 1 shows the potential maximum tax savings for each dollar that is salary sacrificed into superannuation and replaced with a transition to retirement income stream.

* Note: These percentages show the income tax savings per dollar of replaced income which translates into a higher superannuation account balance.

On 17 November 2005, the ATO published a media release stating that the general anti-avoidance provisions will not apply where taxpayers are simply commencing a transition to retirement pension and making salary sacrifice contributions to superannuation. The ATO would only be concerned if accessing the pension or undertaking.

Don’t let your employer underpay you!

Employees entering into a salary sacrifice arrangement need to ensure that they do not disadvantage their non-salary benefits such as leave loading, SG payments and redundancy payments. There benefits are calculated on an individual’s base salary and the salary sacrifice arrangements should not reduce the individual’s base salary and disadvantage their overall employment.

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