Making an income stream non-reversionary is on average likely to be more beneficial for Division 296 tax purposes due to the applicable minimum pension rules, a specialist superannuation lawyer has said.
DBA Lawyers special counsel Bryce Figot confirmed this is the case because of the ATO’s treatment of reversionary pensions with regard to extending their tax status for the beneficiaries and the effect this will have on the proposed calculation method for the new impost.
“The [proposed Division 296 tax calculation formula includes an] adjusted TSB (total super balance). What’s in the adjusted TSB? There is an add-back of pension payments,” Figot told delegates during a session at last week’s SMSF Association Technical Summit 2024 in Sydney.
“Why does adding back the pension payments matter? [ATO webpage reference QC 26864 says] where a pensioner in receipt of a non-reversionary account-based pension dies, we, the ATO, won’t require the minimum pension payment to be made in the year of death.
“Conversely if they died with an automatically reversionary pension, they will have to make that pension minimum [payment].”
He pointed out this means the recipient of a reversionary income stream will ultimately end up having to add back two elements to their adjusted TSB, being the minimum pension amount, commencing from the year of death, and the capital of the income stream in the years subsequent to the one in which the member passed away.
In contrast, only the capital of the income stream will need to be included in the death pension recipient’s adjusted TSB in the years after the original member’s death.
Figot acknowledged this is only a rule of thumb in the context of the proposed Division 296 tax.
“Is that the only thing in the world you need to think about when making a pension reversionary or non-reversionary? No. There are other things to think about. But when it comes to Division 296 tax, I reckon non-reversionary pensions are going to save you money,” he noted.
