Documentation key on reversionary pensions
A draft ruling released by the Australian Taxation Office (ATO) has highlighted the importance of having appropriate documentation in place to ensure a pension is reversionary, according to DBA Lawyers.
Daniel Butler and Nathan Papson, director and lawyer respectively at DBA Lawyers, said that since the release of the draft ruling, reversionary pensions had become a hot planning issue for self-managed super funds (SMSFs).
"They (reversionary pensions) allow a pension to continue to be paid to a surviving spouse, retaining the pension exemption beyond the death of the pensioner, resulting in greater tax efficiency," said Butler.
However the question, according to Butler and Papson, is whether a pension that is commenced without a reversionary nomination can be readily 'converted' to a reversionary pension, without commuting the original pension and restarting a new pension which has a reversionary nomination.
"There is one school of thought that suggests this is not possible," said Butler.
"However, most advisers believe there is no issue when the pension is in the nature of an account-based pension such as an account-based pension, a transition to retirement income stream ('TRIS') or an allocated pension (that commenced prior to 20 September 2007)."
Yet according to Butler and Papson, while ATO comments made in the National Tax Liaison Group superannuation technical minutes of March 2010 suggested that a pension's reversionary status could not be varied after commencement, there is no prohibition in either the Superannuation Industry (Supervision) Act or in the Income Tax Assessment Act.
"Assuming there is flexibility in a fund's governing rules and related documents (which may include deeds, resolutions, pension contracts and legislation, etc), there is no reason why the terms of a pension could not be varied after a pension commences ('mid-stream') to add a reversionary pensioner," said Butler.
"Indeed, this could, under an appropriately worded deed, be by way of a BDBN (binding death benefit nomination), where a member specifies that their pension is to revert and continue to be paid to, say, their spouse upon and following their death.
"Therefore, provided the documents provide the flexibility, a pension could be varied mid-stream to nominate a reversionary pensioner."
But while Butler and Papson pointed out that being able to convert an existing account-based pension to a reversionary pension was a key SMSF succession planning strategy, their recommendation was caution until the ATO provided greater clarity on the issue.
"While we consider the law to be clear for allowing a reversion of an account-based pension mid-stream, given the different ATO views, the safer course would be to commute and start a fresh pension if a reversionary nomination of an existing non-reversionary pension is desired," said Butler.
"However, for those who do not wish to go through the extra administrative hassle of commuting and starting a fresh 'reversionary' pension, they should either seek written comfort from the ATO or obtain further expert advice."
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