By Grant Christensen
A reversionary superannuation pension is a superannuation pension which automatically becomes payable to another person (called the ‘reversionary beneficiary’) upon the death of the SMSF member who is receiving the pension. Due to superannuation law rules which restrict who can receive a deceased member’s superannuation benefits as a pension, generally the reversionary beneficiary will be the deceased member’s spouse.
Recently, reversionary superannuation pensions have come into the spotlight due to changes which are being made to the rules governing eligibility for the age pension. Broadly, to receive the age pension, a person must satisfy either an assets test or an income test. The amount of the age pension paid is the lower of the amounts worked out under these two tests. Currently, account-based superannuation pensions receive concessionary treatment under the income test. From 1 January 2015, the concessionary treatment will be removed and all account-based superannuation pensions which are started on and from that date will be treated the same as any other financial asset for the purposes of the income test.
Account-based pensions started before 1 January 2015 will be grandfathered from this change to the income test provided the recipient SMSF member was also entitled to an age pension at 31 December 2014. This has caused many SMSF members to commence reversionary superannuation pensions so that the benefit of this grandfathering extends to the reversionary beneficiary after their death. Whether this strategy is actually helpful requires some complex actuarial calculations. However, one important point which needs to be considered when commencing a reversionary superannuation pension is how that pension sits with any binding death benefit nomination (BDBN) the member may have made.
For example, you should avoid a situation where Member X makes a BDBN nominating Person Y as the beneficiary of their superannuation death benefits, but then Member X starts a reversionary pension covering all their superannuation benefits and nominates Person Z as the reversionary beneficiary of the pension. In such a situation there may be an issue when Member X dies as to who gets his superannuation death benefits – i.e. Person Y or Person Z? Another way of describing this issue is what takes precedence the reversionary pension or the BDBN?
There is nothing in superannuation law which deals with this issue. There are a number of ways a SMSF trust deed can deal with this issue:
Where the SMSF trust deed does not deal with this issue, there is real uncertainty as to who is entitled to the deceased member’s superannuation death benefits.
The Australian Taxation Office (ATO) considers that where the SMSF trust deed is silent on this issue, the person who is entitled to the superannuation death benefits is the reversionary beneficiary of the pension. This is because a BDBN only operates where the SMSF trustee has a discretion to distribute superannuation benefits. Where there is a reversionary superannuation pension on foot, the SMSF trustee has no discretion but rather is compelled to automatically pay the reversionary beneficiary the pension.
The ATO’s position accords with the general industry view. However, given that there is no actual law on this matter, there is a risk that the person nominated under the BDBN may seek to dispute this outcome. SMSF disputes can be extremely costly since the relevant forum to argue these matters is the Supreme Court.
Rather than exposing an SMSF to uncertainty, it is recommended that an SMSF trust deed contains provisions that expressly state which takes precedence, i.e. the BDBN or the reversionary pension.
