Death benefits, Pensions, Tax

$3m super tax pension risk

SMSF Reversionary pension $3m soft cap tax Pension

Reversionary pension beneficiaries may be at risk of an additional tax hit due to a provision contained within the draft legislation for the $3 million soft cap measure.

Recipients of a reversionary pension may inadvertently incur a liability under the calculation method for the proposed $3 million soft cap tax, according to a technical manager.

Accurium head of education Mark Ellem noted while a contribution made to a member’s account as a result of the initiation of a reversionary pension would not count for the purposes of Division 296 tax, the respective member’s total superannuation balance (TSB) is likely to be impacted.

“The amount that reverts to [a member] in that income year will be regarded as a contribution for Division 296 purposes and excluded from the calculation of earnings, but it’s not excluded from the determination of the total super balance at the end of the year,” Ellem said.

The SMSF Association has previously expressed concerns recipients of a reversionary pension might be unfairly subject to the tax as they will not have time to restructure their finances to accommodate the provisions of the $3 million soft cap, as is currently the case in relation to the Income Tax Assessment Act 1997, to comply with the transfer balance cap.

Ellem warned trustees while the proposed draft legislation for the impost excludes the initial capital contribution to a surviving partner’s or spouse’s account, if a member’s TSB exceeds $3 million, they will be hit with the additional 15 per cent tax.

“Obviously, [the] difference from your opening total super balance to your closing total super balance will increase greatly because it includes the reversion retention amount, but [the] capital amount in that year which reverts to you will be taken out, so your total basic earnings will exclude that amount,” he said.

“The compromise by including that in is okay, but [it] doesn’t mean it gets you totally out of it because [the pension can] still be included in the calculation of earnings in that year that you become a reversionary beneficiary.

“You still might be caught by it because your year-end total super balance might have taken you over the $3 million.”

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