An SMSF member’s ability to convert a pension established as non-reversionary into a reversionary pension through appropriate documentation remains a grey area, according to a lawyer.
DBA Lawyers special counsel Bryce Figot told a recent SMSF Strategy Seminar in Sydney he is still attempting to acquire written advice from the ATO to clarify the matter, but has not succeeded thus far.
According to Figot, the industry had submitted a question to the tax office in March 2013 on the matter, asking: “Can a pension established as ‘non-reversionary’ be made ‘reversionary’ by executing appropriate documentation and not necessarily by having to commute the pension and commence a new pension?”
The ATO responded by saying it depends “on the terms on which the pension is payable, the fund’s deed or governing rules and any other restrictions imposed by law”.
Figot said this means it is permitted subject to appropriate paperwork, adding DBA Lawyers’ SMSF governing rules provided pensions can subsequently be changed to become an automatically reversionary pension through a binding death benefit nomination (BDBN).
However, he said he was concerned with comments released by the tax office in ATO Law Companion Ruling LCR 2017/3 [15], which said a BDBN cannot turn a non-reversionary superannuation income stream into a reversionary super income stream.
“It suggests that our simple tick-the-box option doesn’t work. I don’t think that’s right. I think that’s an oversimplification,” he said.
He said DBA Lawyers director Daniel Butler consulted with the ATO on the issue and concluded he was uncomfortable advising clients to take action that contradicts the wording from the tax office.
The firm is now pursuing this through industry bodies, with the Self-managed Independent Superannuation Funds Association and SMSF Association due to lodge submissions seeking clarity on the matter, he noted.
He said members have the option of ceasing a pension and beginning a new one, but warned this comes with various costs.
“It’s a TBAR (transfer balance account report) event to start a pension, you have to value it when you turn it off, you’ve got to think about the mixing requirements, statements of advice disposing a financial product, super income steam, then starting a new pension, another statement of advice, I suppose, another TBAR report and other minimums for the year,” he said.
