The impact of a new reversionary nomination
A timely look at the significant implications and must-knows of changing a reversionary nomination for your clients.
The implications of changing a reversionary nomination will largely depend on whether it results in the current pension income stream ceasing or new superannuation income stream starting.
Since the government’s changes to the eligibility for the Commonwealth Seniors Health Card (CSHC) on 1 January 2015, I have seen a number of clients who are understandably nervous about the effects of a marriage breakdown in relation to their current superannuation income streams and their continued access to the CSHC.
From 1 January 2015, non-taxable superannuation income has been included in the CSHC income test. Grandfathering is available for older account-based income streams under the income deeming rules for eligibility for the CSHC. But what happens if there is a marriage breakdown?
For the following case study our couple, Paul and Tyler own their own SMSF and have both been receiving account-based superannuation income streams since 2010. They also have valid reversionary nominations in place in respect of each other. Paul and Tyler are going through a marriage breakdown and so they wish to change their reversionary nominations as well as have one member exit the fund. This presents two issues in terms of continued access to the CSHC:
a) Does the alteration of the reversionary nomination end the current income streams, and
b) Does the subsequent income stream received by the exiting member on transfer of the superannuation entitlements out of the original fund represent a new superannuation income stream?
Paul and Tyler divorce and orders dividing superannuation under Part VIIIB of the Family Law Act 1975 (FLA 1975) are made. The orders provide that their respective member account balances are equalised and Tyler will remain in the original SMSF while those assets that support Paul’s income stream are to be transferred to another SMSF.
Changes to reversionary nominations
As Paul and Tyler are no longer married they seek to change the reversionary nominations made in respect of each other. To maintain access to the CSHC and the grandfathering available they must ensure that the respective income streams are not stopped and started anew.
There exists some confusion out there around whether a superannuation income stream needs to be ceased for a reversionary nomination to be changed. Neither the tax law nor the superannuation law provide for when a superannuation income stream ceases for tax purposes, or regulatory purposes.
In Taxation Ruling 2013/5 - ‘Income tax: when a superannuation income stream commences and ceases’ it is provided that cessation is determined by reference to the particular superannuation fund’s governing rules, the requirements of the Superannuation Industry (Supervision) Regulations 1994 (SISR 1994) and the facts and circumstances of the payment of the member’s or dependant beneficiary’s benefit.
Automatic pension reversions are governed by s 59(1)(a) of the Superannuation Industry (Supervision) Act 1993 along with the SISR 1994. However, these provisions do not apply to SMSFs. To put it plainly, members in an SMSF may make nominations in whatever kind of format they wish, as long as, the tax and superannuation laws are not contravened and the trust deed allows for a change in reversionary nominations. Nothing in the tax ruling or law suggests that if Tyler or Paul changed their reversionary beneficiaries their pensions would be stopped or required to be stopped (assuming the particular trust deed allows for this).
Paul and Tyler may also make any binding death benefit nomination without their current income streams being stopped, provided as above, the tax and superannuation laws are not contravened and the respective trust deed allows for it.
In relation to Paul’s exit from the fund, the income stream received from his new fund will amount to a new superannuation income stream. In terms of saving Paul’s eligibility for the CSHC we must look to the ‘wilds’ of the Social Security Act 1991 (SS Act).
The simple answer for Paul is that where an account-based income stream is a Family Law Affected income stream under section 9C of the SS Act and that income stream was not included in the CSHC income test prior to 1 January 2015 then the new income stream will also avoid inclusion in the CSHC income test.
This requires that where the income stream was commuted on or after 1 January 2015 as a part of a divorce settlement under the FLA 1975, the new account-based income stream must be purchased by the direct rollover of the proceeds of the old income stream and the owner of the income stream must have been a continuous CSHC holder through this time.
Conversely, those property settlements without a superannuation splitting order or superannuation agreement made under the FLA 1975, will not receive continuation of the exemption from the income deeming rules, as the resulting income stream will not be a ‘family law affected’ income stream. It is therefore important that clients consider a splitting order if they are in receipt of a pension if they want to retain their entitlement to a CSHC.
Advisors should also be aware of occasions where their clients are receiving lifetime asset-test exempt income streams, as opposed to the asset-tested income streams as discussed above. The rules in relation to these income streams are varied; however continued access to the CSHC for these income streams can be achieved with some creative advising.
Richard Cook, lawyer, Certus Law