SMSF members should consider whether to make a pension reversionary if they are looking to minimise the likelihood of being caught by the proposed Division 296 tax, a legal specialist has advised.
DBA Lawyers special counsel Bryce Figot noted certain pensions carried risks in regards to the $3 million soft cap because of the treatment of different elements of a death benefit under the impost.
“I actually think a non-reversionary pension is the way to go as far as the Division 296 tax goes,” Figot told attendees at an online briefing hosted by DBA Lawyers last Friday.
“[That’s because if I died] on 12 April 2026 with $2 million and [my wife] has $2 million, both in automatic reversionary pensions at the end of the 2026 year, her total super balance will be greater than $3 million and she will be in the Division 296 tax net.
“There’s a whole extra year when she’s in that Division 296 net when she would not have been simply because of the automatic reversionary pension.
“If, however, I died with a non-automatic reversionary pension and you waited for a couple of months until it’s the next financial year, she would escape the net for the next year.”
He added this irregularity existed due to the methodology used to calculate a tax liability with regards to a member’s total superannuation balance (TSB).
“[The] current adjusted TSB has certain modifications. You subtract the capital of the death benefit pension, regardless of reversionary or non-reversionary, and pension payments from death benefits are added back,” he said.
As such, he advised reconsidering whether a death benefit pension needs to be reversionary so as to minimise the impact of the proposed tax on a death benefit.
“Just as a rule of thumb, everyone’s going to be a bit different because there’s a lot of other things to consider, but for couples who in total have more than $3 million, even if individually they don’t, you probably might want to strongly consider non-reversionary pensions,” he said.