Death benefit pensions in line for tax trap
New proposals for TRISs may impact the ability to claim ECPI in some cases, according to one SMSF technical expert.
TRISs that were commenced by way of reversionary pensions will not be automatically converted to account-based pensions under the government’s recent proposals for TRISs, which could impact their ability to claim exempt current pension income from 1 July, according to McPherson Super Consulting superannuation consultant Stuart Forsyth.
Mr Forsyth says due to the definition and the way the government has chosen to deal with TRISs, the auto-conversion of TRISs to account-based pensions will only apply to TRISs that have satisfied a certain condition of release.
“The way they’ve chosen to do the TRIS stuff, they’re not catching all TRISs, they’re only catching TRISs that have satisfied some of the conditions and the one they haven’t covered is death,” Mr Forsyth said.
“If you have a 50-year-old who has their partner’s death benefit pension and their TRIS by reversion, then it won’t be covered by this change in its current formulation.”
Mr Forsyth said one of the things that remain unclear is whether SMSF trustees in this situation would be able to commute the pension back to accumulation before 1 July.
While the draft laws seem to suggest SMSF trustees would be able to convert the death benefit pension back to accumulation before 30 June, the ATO and Treasury are yet to confirm this.
“That would effectively remove the six-month test in tax law from the time of the introduction of this bill, but the ATO seem to be arguing on a more fundamental basis or at least raising the question about whether you could ever convert a death benefit pension back to accumulation,” Mr Forsyth said.
“This is potentially a big issue for those people, because if they’re unable to commute back to accumulation, they’re going to exceed their transfer balance cap, and that doesn’t seem right. From 1 July, we know what the rules are going to be, but to apply the rules to current pensions seems tough.”
If these trustees are able to commute these death benefit pensions back to accumulation, they will need to act by 30 June. Failing which, they might have a problem from 1 July.
“Obviously, not everybody has a death benefit pension, but there are more of them than you think. Partners die and people retain their pensions as a reversion,” Mr Forsyth said.
“There are some very large reversionary pensions. Those people need to act before 30 June, but they need to know what the regulator’s view is before they can act.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.