This article discusses how a reversionary pension is treated for transfer balance cap purposes.
A reversionary pension is a pension income stream that automatically reverts to another individual upon death of the original pension member.
The term original pension member can be read as original pension owner or original pension recipient.
A pension counts towards a member’s transfer balance cap when that person is a retirement phase recipient.
A pension income stream is deemed to be a reversionary pension if a reversionary beneficiary was nominated at the commencement of the pension.
A reversionary pension is considered a superannuation death benefit.
Reversionary Pension Transfer Balance Cap
Ordinarily, a pension will count as a credit towards the transfer balance cap as soon as the pension begins.
The current transfer balance cap is 1.6 million.
The transfer balance cap is the maximum that a member can transfer into tax-free pension phase.
The transfer balance cap is member specific.
If a superannuation pension member dies, their transfer balance cap dies with them.
If the deceased pension member had a reversionary pension in force just before they died, which consequently transferred to the beneficiary, the pension will count towards the reversionary beneficiary’s transfer balance cap.
This can cause the beneficiary to inadvertantly exceed their own transfer balance cap, as they would have had no idea when the original pension member was going to die and how much of the residual pension balance would be transferred to them.
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Being penalised for inadvertantly exceeding the transfer balance cap can be harsh, particularly at a time when the pension beneficiary is greiving the loss of a loved one.
To combat this, Section 294-25 of the Income Tax Assessment Act (ITAA) Item 2(b) ensures that the credit of a reversionary pension only counts towards the reversionary pension beneficiary’s transfer balance cap 12 months after the day that the pension beneficiary was entitled to the reversionary pension (i.e. the date of death).
This gives the reversionary beneficiary 12 months of breathing space to allow their retirement savings to be re-arranged and ensure the transfer balance cap is not exceeded.
Pre 1 July 2017 Reversionary Pension Transfer Balance Cap
If a beneficiary inherited a reversionary pension more than 12 months prior to 1 July 2017, the reversionary pension balance will count towards their transfer balance cap from 1 July 2017.
If the beneficiary inherited the pension less than 12 months before 1 July 2017, it will be credited towards their transfer balance cap 12 months from the date of death.
Can You Commute A Reversionary Pension?
Commutation of a reversionary pension can occur at any time.
A reversionary pension can be rolled over to another superannuation fund at any stage.
The full rollover amount must be transferred into an income stream. Some or all of the rollover cannot be made to accumulation phase.
Alternatively, a full or partial commutation can be made as a lump sum withdrawal out of the superannuation environment.
A rollback of some or all of a reversionary pension to accumulation phase (also known as a commutation) is not permissable.
Depsite a rollover to another superannuation provider, a reversionary death benefit pension will remain a death benefit superannuation interest, including the concessional tax treatment associated with a death benefit pension.
What is not a Reversionary Pension?
A reversionary pension is not an income stream paid to a deceased’s beneficiary if the death benefit was paid to that beneficiary as a result of trustee discretion.
Furthermore, a reversionary pension is not a pension paid to a beneifciary as a result of a binding or non-binding nomination submitted to the trustee by the deceased prior to their death.
A reversionary pension is only a reversionary pension where it was nominated as a reversioanry pension at its initial commencement.
Reversionary Pension Tax Treatment
The tax treatment of a reversionary pension is assessed against the reversionary beneficiary.
Reversionary pension tax treatment is based on the age of the beneficiary and the tax elements of the balance.
A death benefit pension (including a reversioanry pension) can only be paid to a superannuation dependant.
A reversionary pension balance can include a tax-free element, taxable (taxed) element and/or a taxable (untaxed) element.
All income received from a reversionary pension is received proportionately from each tax element.
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You can find out the tax element proportions of a reversionary pension by contacting the pension income stream provider.
If the reversionary pension provider is a SMSF, you can contact the administrator or accountant of the SMSF to find out the tax element proportions.
The tax-free proportion of a reversionary pension is always received tax-free.
The taxable portion of a reversionary pension is taxed in the hands of a dependant beneficiary as follows:
| Age of Deceased | Death Benefit Payment | Age of Beneficiary | Tax on Taxed Element | Tax on Untaxed Element |
|---|---|---|---|---|
| Aged 60 & Above | Income Stream | Any Age | 0% | MTR less 10% tax offset |
| Below Age 60 | Income Stream | Age 60 & Above | 0% | MTR less 10% tax offset |
| Below Age 60 | Income Stream | Below Age 60 | MTR less 15% tax offset | MTR (no tax offset) |
Transfer Balance Account Reporting (TBAR)
When is TBAR reporting due for a reversionary pension SMSF?
The Transfer Balance Cap rules require accurate reporting of the any credits towards an individual’s Transfer Balance Cap.
This includes reversionary pension income streams, which count towards the beneficiary’s Transfer Balance Cap.
For reversionary pensions, a credit does not apply against the beneficiary’s Transfer Balance Cap for 12 months from the date that the pension reverted to them.
However, for TBAR purposes, the reversionary pension must be reported by a SMSF to the ATO within the ordinary prescribed quarterly or annual timeframe from when the pension reverted.
The ATO will then record a pending credit against the reversionary beneficiary’s Transfer Balance Cap.
