Cut Div 296 tail with pension

The use of an automatic reversionary pension (ARP) may be a way to prevent SMSF members leaving their estate with a lingering Division 296 liability, DBA Lawyers director William Fettes has stated.

Fettes said the different operations of an ARP compared to a non-reversionary pension in light of the draft regulations for the new tax meant it was possible to fix an end date for any liabilities.

“An ARP becomes immediately payable to the recipient, the reversionary beneficiary, and is immediately part of their total super balance and because of that may cause them to be in scope for Division 296,” he said.

“The non-reversionary pension position is different because it’s only going to form part of the recipient’s total super balance upon commencement of the new pension.”

He added the draft regulation 296-70.04 for Division 296 includes the concept of future earnings being attributable to a deceased interest in the year of death, regardless of when any death benefits are paid out.

“If these regulations are finalised, it may result in future fund earnings being attributed back to the deceased member for their final assessment,” he said.

“Now that regulation will not operate where certain conditions are satisfied, which relate to all death benefits being paid or distributed, or where there’s a retirement-phase recipient of the superannuation income stream supported by the relevant interest.

“My qualification here is that ARPs may play a role in that.

“Coming back to the issue of reversionary versus non-reversionary, if these rules go ahead, the ARP can potentially create a line in the sand and not keep adding future earnings because the cashing has been dealt with in one year.

“There might be circumstances where this creates more certainty about the year-of-death Division 296 assessment for the deceased being finalised without the scope for a form of earnings creep in future years.”