ATO casts doubt over BDBN pension treatment

The ATO has hinted it will be examining whether a binding death benefit nomination (BDBN) can affect the treatment of an existing member’s pension upon the death of that member.

“The ATO recently came out just with an off-the-cuff comment that they don’t think binding death benefit nominations can make a pension reversionary,” DBA Lawyers special counsel Rebecca James told advisers at the firm’s most recent series of SMSF strategy seminars.

“So if you’re paying a pension and you note in your BDBN that pension is to be auto-reversionary, there has been some doubt cast over the validity of that approach.”

James emphasised there have been no legal or case law examples on which the regulator has based its point of view to date.

She added in her assessment of the situation there was no reason why an application of a BDBN in this manner would be problematic.

“I think because a BDBN is a permitted fetter both under legislation and most deeds it doesn’t seem like there should be any issue with that direction being given to the trustee via a BDBN, but we’ll wait and see if there is any further commentary on that,” she said.

In addition, James pointed out increased scrutiny of auto-reversionary pensions may have implications for SMSF trust deeds as well.

“There’s a question of well if a pension is reversionary and so it’s going to a reversionary beneficiary, which takes away a trustee’s decision-making power, does that need to be an express power under the deed that permits them to fetter their discretionary power in advance in that way,” she said.

“So I think there will be some interesting questions around are the deeds, sufficient to allow you to pay a reversionary pension and are the pension documents sufficient.”

She said other issues likely to attract unprecedented attention in relation to reversionary pensions include whether the reversionary pensioner has to be auto-reversionary from the start date of the pension and whether the pension can be varied to turn it into an auto-reversionary pension at a later point in time.

“[To the last point], we’ve historically taken the view that yes we can because it’s not a huge change to the term of the pension and it doesn’t impact on the drawdown, certainly during the life of the member,” she said.

The increased focus on auto-reversionary pensions has come about due to the more favourable treatment of these types of death benefits under the new super reforms.

The new laws dictate a credit will not arise against the transfer balance account of a surviving fund member who is a recipient of an auto-reversionary pension until 12 months after the day that pension becomes payable.

By contrast, a transfer balance account credit will be generated from the day a death benefit pension becomes payable if the pension is not auto-reversionary.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital