David Busoli, principal of SMSF Alliance, said under the new regulations that although the reversionary pensioner’s transfer balance cap is not affected for a year after the reversion, their total super balance is increased immediately.
“This means that they will become subject to Div 296 tax if their end of year total super balance is over $3 million,” he said.
Previously, on the death of a pensioner with a reversionary pension, the survivor became automatically entitled to the deceased member’s pension which had both estate planning and tax ramifications.
“From a tax perspective, the surviving member’s transfer balance cap is not affected for a year so they can continue to receive the benefit of tax-exempt income being generated within their superannuation fund for at least that long,” Busoli said.
“Just prior to a year after the primary pensioner’s death, the reversionary beneficiary would make an adjustment to their affairs to ensure they do not breach their personal transfer balance cap. This generally involves some combination of retaining the reversionary pension and commuting sufficient of any pension the reversionary pensioner may have been receiving in their own right, back to accumulation.”
He continued that under the new regulations as the individual’s total super balance is not measured during the year, they may have time to withdraw sufficient to bring them under the limit prior to 30 June.
“The downside of such an adjustment is that it will lower the tax benefit gained from maximising the period in which the member’s account is in the tax-free pension stage. It also assumes that there is sufficient time between the primary pensioner’s death and 30 June for such an action to be possible,” he said.
“The question is, does it matter? The Div 296 tax impost may not be greater than the tax saving gained by maximising the pension exempt income. In any case, estate planning considerations may override other considerations. Whether a reversionary pension should be adjusted to non-reversionary will depend on each member’s circumstances.”
Busoli said the process of altering a reversionary pension to non-reversionary will differ depending on the SMSF deed and the pension documentation.
“Most pensions are stand-alone items that will require a full commutation and restart, however, there are others that can be altered by way of resolution,” he said.
“Be careful though, this will not only depend on the trust deed. It will also require the pension documentation to have been prepared in accordance with the relevant deed rule. It will not be unusual for pension documentation to have been prepared as a stand-alone document which, though usually valid under the deed, will not have been created in accordance with the deed’s flexibility. Individual investigation will be required.”
Furthermore, Busoli said, in its first year of operation, the application of Div 296 will be based on the member’s end-of-year total super balance.
“As the total super balance for a deceased member becomes nil, there might be a tendency to delay the consideration of this issue,” he said.
“However it is not the deceased member’s account that is relevant here, it’s the account of the reversionary beneficiary, so they will be affected if their total super balance is over $3 million at 30 June 2027.”
