The transition to retirement rules are, in summary, designed to allow/encourage people to continue to work after age 55 on a reduced and reducing basis, and still produce and not draw government benefits in the meanwhile, rather than being forced to retire at age 55. The idea is if you promise to not take a lump sum until a condition of release has been reached (eg you stop work permanently or you reach age 65) you can access part of your super after age 55 without stopping work.

TRAPs combine with salary sacrifice to create a strategy that should be mandatory for all doctors over age 60. The idea is simple: the doctor starts a pension all investment earnings in the SMSF become  tax free, and the pension income is tax free in the doctor’s hands. The doctor then arranges for all or part of his or her other practice income to be paid to the fund as deductible contributions, taxed at just 15%. If the doctor is not married, these contributions are capped at $100,000. But if the doctor is married, these contributions effectively become $200,000 (or $150,000 if the doctor’s spouse is under age 50).

In summary, the doctor lives on the tax free pension income, and possibly other investment income, investment reserves or even borrowings, while practice income is in effect taxed at no more than 15%, ie in the form of contributions in the hands of the fund.  All doctors over age 60 with superannuation benefits should be paid a superannuation pension. There are no exceptions.

Some interesting additional materials are found here:

• the ATO view: ATO Guidance on transition to retirement pensions;
• McMasters’ 2008 Year End Superannuation Planning, which can be accessed here: 2008 Year End Superannuation Planning; and
• McMasters’ materials on transition to retirement pensions McMaster's Guide to TRAPS

The ATO accepted this arrangement as effective when it released a media statement on 17th November 2005 as follows:

Guidance on transition to retirement pensions: Media Release Nat – 2005/66

The Tax Office today clarified how transition to retirement pensions will be treated.

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.

Some strategies have encouraged people to draw down on their supern by accessing a transition to retirement pension while salary sacrificing back into their retirement savings. Under these arrangements the pension provides an additional source of income, while salary sacrifice tops up the taxpayer’s retirement savings.

Tax Commissioner Michael Carmody said “there has been some media interest recently in the promotion of this strategy. Arrangements entered into in a straight -forward way are consistent with the operation of the law, and we do not see grounds for applying anti-avoidance rules.

“For example, an eligible person may take out a pension under the transition to retirement rules. At the same time, that person may engage in an effective salary sacrifice arrangement and contribute to a complying superannuation fund for their own benefit.