The ability to change a reversionary pension to a non-reversionary pension within an SMSF has not really been tested, but it would be possible under the law provided the fund’s documentation allowed it, a trio of SMSF specialists have said.
Cooper Partners Financial Services director Jemma Sanderson noted one way to change the status of a reversionary pension was to commute and restart it as a non-reversionary pension, but pointed out such a change in the terms of the income stream had not been tested.
“The challenge with that move is it remains untested. In a situation where someone did do that, and the deed allowed it, so you change that status in situ whether from a reversionary pension or not, that could be something that gets challenged,” Sanderson said at The Tax Institute National Superannuation Conference in Sydney recently.
“I would love to see that challenge so we can see what the outcome is because the tax office has their view. The deed may allow it, but does it actually stand up?
“There is also the consideration that if it is a reversionary pension, and those documents conflict with the death benefit nomination, which one takes precedence?
“Every deed has different considerations or they are silent on this issue, so what does that mean? Again it shows the importance of being aware of what your deed says and what that outcome might look like.”
DBA Lawyers director Dan Butler, who was chairing the presentation, added his firm believed it was possible to do as Sanderson suggested and it had included that ability in its documentation.
“On the basis of the DBA deed, we are comfortable that you can change the terms of your pension if it’s an account-based pension,” Butler said.
“If it’s a lifetime or a fixed-term pension, there are difficulties, but from a legal perspective we believe we have ATO materials to back that up as well.”
He was supported in this view by Sladen Legal principal Phil Broderick.
“I think you can change it. It is a contractual arrangement and like all contractual arrangements you can change them,” Broderick added.
“It’s like that old Greek story [of the ship of Theseus] where if you change every bit of wood in a boat, when does it stop being a boat? In the end it’s still the same boat even if every plank of wood in the boat has changed.
“So unless you’re really critically changing a pension contract to such an extent it ceases to be a pension, all you are doing is changing the terms and you are allowed to do that subject to the documents.”
