The aging population and the Australian Taxation Office’s (ATO’s) recent draft pensions ruling (TR 2011/D3) highlights the need to review clients’ overall succession planning.
Advisers should look at formulating a self-managed superannuation fund (SMSF) succession planning strategy that can be applied across their client base. Naturally, clients’ needs are different – some may prefer standard documents, whereas others demand premium or tailored services.
SMSF succession planning is more than just commencing a pension or completing a binding death benefit nominations (BDBN) form for a member. SMSF succession planning should include a review of the member’s will, enduring powers of attorney and other estate planning needs.
Recent succession planning issues
Some of the recent issues to do with pensions highlight the importance of having the right documentation in place.
BDBNs v auto-reversionary pensions
In recent months, advisers have been divided as to whether a BDBN takes precedence over an ‘auto-reversionary’ pension, or vice versa.
The BDBN/auto-reversionary pension controversy arises where, for example, a BDBN stipulates that the member’s benefits are to be paid to the member’s children from a previous marriage, but the pension documentation requests the trustee to pay the member’s benefits to the member’s second spouse. With blended families becoming more common in modern society, this inconsistency is also more common.
The correct position is as follows:
A BDBN will usually validly bind a trustee of a trustee’s discretion that is usually authorised by the governing rules of the SMSF; and
An auto-reversionary pension, under most SMSF deeds, is merely a request by the member of the SMSF trustee or a trustee resolution.
Therefore, if there was a conflict, the BDBN will ordinarily win.
However, the conflict can easily be avoided. BDBNs and auto-reversionary pensions should be consistent, as well as align with the SMSF member’s other estate planning documentation (eg, wills, enduring power of attorney, etc).
TR 2011/D3
The ATO in TR 2011/D3 outlines its view of when a superannuation income stream (eg, a pension) will cease upon a member’s death.
The ATO’s view is that a pension will (generally) instantly cease upon the SMSF member’s death. However, the pension will continue if a ‘dependent beneficiary’ is automatically entitled to receive the pension.
There are a number of adverse tax risks that may arise as a result of a pension ceasing – if only for a day – upon a member’s death. These consequences include a ‘blending’ of tax-free and taxable components within the SMSF, as well as losing the ‘exempt’ status of income derived from assets supporting the pension.
As such, TR 2011/D3 highlights the need for appropriate succession documentation to be in place for each pension.
Required action
Advisers should review all clients with pensions to see if they are exposed by not having an auto-reversionary pension. This review should encompass a comprehensive review of each client’s SMSF and succession planning documents, including wills, BDBNs and enduring powers of attorney.
Advisers could also use this review as the opportunity to ensure that a smooth succession plan regarding the control of the SMSF is in place. Successor director and successor trustee documentation can be implemented to help achieve this.
Comprehensive SMSF succession planning requires consideration of a number of different factors that are not covered in this article. As such, advice should be sought in relation to a SMSF member’s succession planning.
Daniel Butler is a director and Nathan Papson is a lawyer at SMSF law firm DBA Lawyers.
