The practice of creating automatic reversionary pensions inside an SMSF may need to be reassessed if the Division 296 tax is introduced, particularly where the strategy results in one member’s balance being pushed over the $3 million threshold that applies to the proposed impost.
DBA Lawyers special counsel Bryce Figot said the Division 296 tax was likely to shift how people assess reversionary pensions and may even cause a preference for them to be non-reversionary in an SMSF.
“There is going to be more to the picture with pensions and previously the approach was just make them automatically reversionary,” Figot said during a recent online briefing hosted by the law firm.
“Now, especially for people when you add their money together and are over $3 million, there’s probably a benefit to not have pensions automatically reversionary anymore.
“It means a bit more paperwork on death, but it might be worth it.”
To illustrate his point, he used the example of Veronica and Tim, who were in an SMSF with combined total assets of $6 million on 1 July 2025 and each had total super balances of $3 million, made up of $2 million in an account-based pension (ABP) and $1 million in accumulation phase.
Their pensions are both set to automatically revert to each other and on 1 May 2026, Tim dies and his pension automatically reverts to Veronica, who receives $200,000 of pension payments on 1 June 2026.
“On 30 June, the SMSF is now worth $6.4 million. Where did I get that from? Well, I assume the SMSF has gone up 10 per cent to $6.6 million, but $200,000 got used,” Figot said, noting Veronica now holds both accumulation accounts, each worth $1.1 million, and both ABPs worth $2.1 million.
“How much is the Division 296 tax? With an automatic reversionary pension, on those facts, it is $32,550, but what happens if the pension was not reversionary?
“Let’s assume the same facts, except the pensions are not automatically reversionary and there is only a $100,000 payment to Veronica as there is no payment in respect of Tim’s pension, which automatically ceased upon death.
“How much is the Division 296 tax now? Firstly, Tim doesn’t pay it because he’s dead and Veronica, instead of paying over $30,000, is now only paying around $2800.
“When the pension was automatically reversionary there is more than $32,000 in Division 296 tax and if it’s not automatically reversionary, there’s less than $3000, so an automatic reversion will probably cost her $30,000 in tax.”
