Most people who have not sat with a planner or read in detail the newsletters from their superannuation funds would believe that they can only access their superannuation when they actually retire and stop working. But there are so many other circumstances that could trigger an all-important “Condition of Release” and make your retirement funds available to you. In this guide for SMSF trustees I will concentrate on meeting the Retirement Condition of Release but you can find out about the other conditions of release here (click it later).
Acknowledgement: I have relied on the excellent guidance of the AMP TAPin team for the majority of the content in this article. They write great technical articles for advisors and I try and make them SMSF trustee friendly.
What is the Retirement condition of release
The retirement condition of release is often subject to complexity and doubt. However, understanding the rules has become even more important after 1 July 2017 resulting from 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 and it becomes a Transition to Retirement Income Stream- Retirement Phase (TRIS – Retirement Phase). Therefore, understanding what constitutes ‘retirement’ for an SMSF member in a TRIS is critical, 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. 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.
If you do leave your member account in 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 $1.7m 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 $1.6m and $1.7m. You can Check 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 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 |
- 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 (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:
- An arrangement under which the person was gainfully employed has come to an end; and
- The trustee is reasonably satisfied that the person intends never to again become gainfully employed on either a full-time or part-time basis (ie 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 may intend 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 3 day 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. 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 (eg,s he also leaves her second employer).
Example: Two employment arrangements
Frank (age 63) 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, ie 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 lot where often 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, ASIC re company registration and the ATO to pay tax instalments, which are more akin to Directors Duties.
When is a person gainfully employed?
The preservation age to age 59 retirement condition of release requires that a member has no intention of returning to gainful employment on either a part-time or full-time basis. 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 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 instead of an employer, drawing an income from a trade, profession, or business that they operate personally. It would be expected that someone who claims to be self-employed would be 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 of running a business:
- whether the activity has a significant commercial purpose or character;
- whether the taxpayer has more than just an intention to engage in business;
- whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
- whether there is repetition and regularity of the activity;
- whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
- whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit;
- the size, scale and permanency of the activity; and
- whether the activity is better described as a hobby, a form of recreation, or a sporting activity.
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. That is, 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. So, the level of reward could be relatively small yet still suffice – as long as there is a direct link to the activity being performed. Further, 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.
Also, as discussed earlier, gainful employment for superannuation purposes requires an individual to be either employed or self-employed. Most charities or volunteer organisations will not consider their charity or volunteer workers to be employees.
Transition to retirement pensions – impacts of meeting retirement condition of release
Transition to Retirement Income Stream (TRIS) condition of release allows a member to access their superannuation as a non-commutable income stream once they have reached 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 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.
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 effective under 60 and tax free after 60. However, a TRIS will regain its tax exempt status once the ‘retirement’ condition of release is subsequently satisfied, for example, where the individual terminates employment at any stage on or after age 60. Its a fairly simple process to confirm to your Pension provider that you have met that further condition of release and they may authomatically move you to Transition to Retirement Income Stream- Retirement Phase (TRIS – Retirement Phase) at 65 anyway, but its worth confirming with them in writing.
From 1 July 2017 it will be 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 (eg 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 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 indicidual’s $1.6-$1.7 million pension transfer balance cap.
Evidencing cessation of gainful employment
The cessation must be genuine. 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.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
John Doolette
/ September 20, 2019Thanks for sharing importance of Retirement Condition. I got some knowledgeable point to discuss with consultant for my super
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SMSF Coach - Liam Shorte
/ September 20, 2019Thanks for the feedback John
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