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The importance of retirement 'conditions of release'

Most people believe that they can only access their superannuation when they retire and stop working, but there are many other circumstances that could trigger an all-important 'condition of release' and make retirement funds available.

This guide focusses on SMSF trustees but I will address accessing retirement savings generally. You can find out more about conditions of release here. Acknowledgement: I have relied on the excellent guidance of the AMP TapIn technical team for much of the content in this article. 

What is the retirement 'condition of release'?

Since 1 July 2017, the tax exemption on investment earnings supporting a Transition to Retirement Income Stream (TRIS) - Accumulation Phase is no longer available. However, a TRIS regain its tax-exempt status once the retirement condition of release is satisfied and it becomes a Transition to Retirement Income Stream - Retirement Phase.

Therefore, understanding what constitutes ‘retirement’ for an SMSF or other super member in a TRIS is critical to achieve the 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. There is no requirement under any other condition of release to either cash out a benefit or commence an income stream from your SMSF and member accounts can remain in accumulation phase indefinitely.

A member account in accumulation phase is 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 $1.7 million limit on how much can be transferred into an income stream with people who already had some money in pension phase having as pro-rata limit of between $1.6 million and $1.7 million.

Check on my.gov.au> ATO service> Super Tab> Information to see your limit.

The most common condition of release to access your account is reaching preservation age and retiring.

Date of birth

Preservation age

Preservation year

Before 1 July 1960

55

2014-15 (and prior)

1 July 1960–30 June 1961

56

2016–17

1 July 1961–30 June 1962

57

2018–19

1 July 1962–30 June 1963

58

2020–21

1 July 1963–30 June 1964

59

2023–24

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 TRIS – Accumulation Phase. However, that income stream will not be tax exempt until you meet a further retirement condition of release on reaching the age of 65, when a member may access their benefits any time without restrictions.

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 (eg reaching age 65, invalidity, terminal illness, severe financial hardship).

Preservation age but under age 60

Where a member has reached a preservation age that is less than 60, their retirement occurs when:

  1. An arrangement under which the person was gainfully employed has come to an end, and
  2. The trustee is reasonably satisfied that the person intends never to again become gainfully employed on either a full-time or part-time basis (i.e. for 10 or more hours per week).

To evidence retirement, the SMSF trustee should request a declaration from the member that they have ceased work and they have no intention of being gainfully employed for more than 10 hours a week ever again.

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 intends to return to the workforce. This condition presents an opportunity for many people to move a taxed pension to tax-exempt phase earlier.

Example: Reaching age 60

Michelle has worked as a nurse for many years. She resigns from this employment on her 61st birthday. Three months later, Michelle takes up a three-day a week position as a grief counsellor. Because Michelle has ceased employment as a nurse 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.

However, 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., she also leaves her second employer).

Example: Two employment arrangements

Frank is 63 and works part-time as a school janitor. During the school holidays, he had a short-term six-week contract to work as a census form collector. The contract finished in September 2021.

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 a spouse had 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 they may still handle the liaison with the tax agent on the financials and the ATO to pay tax instalments, which are more akin to director's duties.

When is a person gainfully employed?

Someone is 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 (at least 10 hours per week and less than 30 hours per week) or full-time basis (at least 30 hours per week).

The definition of gainful employment involves two clear components:

  1. Employment or self-employment, and
  2. Gain or reward.

The term employee is not specifically defined in the SIS Act for this purpose so its common law meaning must be considered. One definition of employee is:

‘a person in a 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 people work for themselves running their own business (e.g., have a business plan, financial records, an ABN, a regular and frequent level of activity in the business, advertising, etc).

The superannuation legislation provides no guidance as to what ‘running a business’ is. However, taxation law does. In particular, paragraph 13 of Tax ruling 97/11 outlines relevant indicators.

Gain or reward is not defined in the superannuation legislation and therefore takes its ordinary meaning. The Macquarie Dictionary defines gain as ‘to get an increase, addition or profit’. Reward is defined as ‘something given or received in return for service, merit, hardship, etc’.

In the context of satisfying the gainful employment definition, it follows that 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 for the activity. The actual level or amount of gain or reward does not necessarily have to be commensurate with the level of effort or activity undertaken. The reward doesn’t necessarily have to be received as cash, but could be received as services, fringe benefits, or other valuable consideration.

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, would clearly not qualify as gainful employment. Mere reimbursement of expenses would not seem to constitute gain or reward.

Transition to retirement pensions

A Transition to Retirement Income Stream condition of release allows a member to access their superannuation as a non-commutable income stream once they have reached preservation age, subject to a maximum annual draw down of 10% per annum. Preserved benefits cannot be accessed through a TRIS as a lump sum until it meets the new 'pension phase' position. 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 at 65, but it’s worth confirming with them in writing.

SMSF trustees should immediately contact their fund accountant or 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 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 and obtaining tax exemption on earnings, if within the individual’s $1.6-$1.7 million pension transfer balance cap.

Evidencing cessation of gainful employment

Genuine terminations of employment will 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 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.

 

Liam Shorte is a specialist SMSF adviser and Director of Verante Financial Planning. He is also a Director of the SMSF Association, and he writes under the social media identity of 'The SMSF Coach'.

This article contains general information only and does not address the circumstances of any individual. It is based on an understanding of relevant legislation and rules at the time of writing, which may change.

 

13 Comments
Bob
January 30, 2022

Shouldn’t the 59 preservation years be 2022-23

Marieanne
January 29, 2022

I am 56 female wanting to know can I access my super to buy a house I no longer work and don't want to go back to work currently on centre link if so how?

George
January 30, 2022

Hi Liam, my wife is self employed as a GP in a private practice she owns equally with other doctors as associates. She takes a share of the profits as well as her earnings from seeing patients. She works 3 days a week but most of her income is profit from the business. She is 61 and will soon sell her units in the trust that owns the business. She intends to commence a super pension but would like the option of continuing to work in the same practice 2 days a week after she has retired as a business owner. Does retirement as a business owner satisfy a condition of release in this situation?

Liam Shorte
February 04, 2022

Hi George, from the information you have provided I can't see that your wife will cease an employment arrangement on or after the age of 60, so she may have to wait until 65 or until she stops one employment completely. Just ceasing to be a business owner may not sufficient as it is not an employment relationship even though she may be paid directors fees.

Has she considered doing some Locum work/covering for another doctor for a short time in a different clinic and when that employment arrangement ends, then she will meet a condition of release? Please speak to your financial planner about the strategies she can use.

The example I have seen most often is where doctors/opticians/vets do a stint as a locum for the likes of the Western NSW Local Health District to let local doctors have some holiday leave. This is usually a one-off locum position for a few weeks or a few months if they want to try the country lifestyle. Once they finish that employment relationship they have the benefit of meeting a condition of release. I am now seeing the same strategy used by plumbers/electricians/mechanics and admin staff filling in much-needed roles in outback communities.

Jenny
February 03, 2022

Hi Mariene,

I am 54 and in the same situation. I need to buy a home and have funds preserved to 60. I am unable to go back to work, but would like not to pay rent and find a low priced property, with no mortgage.

Liam Shorte
February 04, 2022

Hi Jenny, please see my reply to Marieanne above. If however, you cannot go back to work for a medical reason then you should consider your options under a Total & Permanent Incapacity Condition of Release https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/Early-access-to-your-super/#Accessduetopermanentincapacity and also explore if you have valid claim on any insurance in your super fund(s).

Liam Shorte
February 04, 2022

Hi Marianne, I am sorry but unless you can prove severe financial hardship I cannot see a way of accessing your super until you meet your preservation age unless you a Totally and Permanently Incapacitated. The hardship provisions also only provide limited amounts. The minimum amount that can be withdrawn is $1,000 and the maximum amount is $10,000. If your super balance is less than $1,000 you can withdraw up to your remaining balance after tax. I can't see how this would help you buy a house https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/Early-access-to-your-super/#Access_due_to_severe_financial_hardship

If you are planning to take most of your superannuation out at 60 to buy a home then you should talk to your super fund or adviser as that is only 3-4 years away and you need to consider if the risk you are taking in your current investment option is suitable for such a short-medium time frame.

Annie Davis
January 28, 2022

Hi Rob,
Thanks for the article, I was looking at retiring at my preservation age of 60. However, I was looking at investments and passive income on the internet to retire before 60, then collect my super when my age allowed. However, not sure how this will pan out with the gains issue even though actually not working. My other issue I was looking at building other passive income up but not working as long after it was set up before 60 years of age. Does this type of investments and passive business models interfere with the superannuation been granted at preservation age?

Liam
January 28, 2022

Hi Annie, you non-super assets won’t affect your rights to your super at 60. Most superannuation pensions except from some government untaxed schemes are tax exempt after age 60 and the pension or lump sum is not even reportable on your tax return. So if not working you can earn about $23,447 from investment earnings each yea without paying tax. So using a combination of investment earnings and some capital drawdowns you can fund a decent lifestyle until you can access your super at 60. Just manage any large capital gains over a few years or use concessional super contributions to reduce the tax in the gain. You can still make tax effective concessional contributions up to age 67 even if not working. Plan, plan , plan!

rgf
January 27, 2022

Sorry Liam you have confused me too... I stopped working at 55 with no intention of working again and am now 63. Just today I rolled over one of my GESB untaxed accumulation funds into our smsf in order to pay the tax and to start a tax free pension stream on the basis of having reached my preservation age at 55 and no longer intend to work...being 63 and choosing to do this now is purely a matter of financial convenience...so are you saying that I cannot do this?

Liam
January 28, 2022

You are fine. Fully retiring is a condition of release. But if you had moved to pension phase and the then went back to work and received more super contributions then these are only released when you meet a new condition of release like retiring again or leaving one employer after age 60. As you fully retired at 55 you can start your pension now as you have retired.

Rob
January 27, 2022

Thanks Liam,
I find the statement "retirement occurs when an arrangement under which the person was gainfully employed has ceased on or after the person reached age 60" somewhat misleading.
Isn't it true to say that if my preservation age is 60, and I cease a working arrangement before age 60, and also stop working all together prior to age 60, then I have actually met a condition of release (at age 60) and can access super?

Liam
January 28, 2022

Hi Rob, this article is about the “Other” ways to satisfy a condition of release. Fully Retiring (ceasing work and no intention to return to work more than 10 hours per week) after your Preservation Age will always be one of the most common way to access your super, although reaching 65 is the most well known. It would and does take hundreds of pages to explain all the conditions of release in detail so I was just concentrating on the most likely ones that people miss from my experience.

 

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