28/08/2018

Some doubt has been expressed about the ability of a member to use a BDBN to convert their non-reversionary pension into a reversionary pension.

Before considering whether you can convert a non-reversionary pension into a reversionary pension using a death benefit nomination, it is useful to ask: why is it important to know?

Different tax and superannuation rules apply to reversionary and non-reversionary pensions and therefore it is very important to be able to clearly characterise the pension after the member’s death so as to know how those rules apply in the circumstances.

If the conversion results in the start of a new pension the break in continuity could cause problems while if it is the same pension after the conversion there is no such break and the change is nowhere near as traumatic legally.  

If the conversion results in a new pension the break in the continuity may give third parties the chance to make mischief.  The trustee of the fund might challenge the efficacy of the death benefit nomination and might refuse to follow it.  Or the member’s family might challenge the arrangements, especially in NSW where the commencement of a new pension might allow a challenger to argue that the death benefits are part of the member’s notional estate for the purposes of a family provision claim.

And then there is the issue of the recipient’s transfer balance account and in particular the timing of the credit to that account of the deceased member’s death benefit proceeds .  Different rules apply for death benefit income streams commencing before or after 1 July 2017, so for simplicity’s sake only the post 1 July 2017 situation will be reviewed here.

If the pension is reversionary then the date of the member’s death is the date on which the recipient is entitled to receive the death benefit income stream (automatically under the terms of the pension and without the discretion or consent of any third party).  The amount supporting that income stream is valued at the date of death but is not credited to the recipient’s transfer balance account until the first anniversary of that death.  The legislation has provided the recipient with a 12-month window to re-arrange their affairs in light of the death benefit so as to ensure they don’t exceed their transfer balance cap.

If the pension is non-reversionary then
 
•    the date of calculation of the amount to be credited to the recipient’s transfer balance account (being the value of the amount supporting the death benefit income stream), and

•    the date when the amount is to be credited to the recipient’s transfer balance account are the same: namely the date when the recipient becomes entitled to be paid the death benefit income stream.

It has been said that the ATO does not permit the conversion of a non-reversionary pension to a reversionary pension.  But let’s look closer.  The ATO says in paragraph 15 of LCR 2017/3:

“A binding death benefit nomination by itself does not make a superannuation income stream reversionary.  If the governing rules or the agreement/standards under which the superannuation income stream is provided does not expressly provide for reversion then a binding death benefit nomination cannot alter this.  The binding death benefit nomination may have the effect of directing the superannuation provider as to whom the death benefit is to be paid and the form but it cannot turn a non-reversionary superannuation income stream into a reversionary superannuation income stream.”

No legal support is given in relation to this statement.  

The comment is interesting in its use of the term ‘by itself’.  This suggests that a BDBN could create the conversion if it was supported in some other document such as the trust deed or the specific terms of the pension. For example if the trust deed specifically permitted the member to alter the pension terms via the use of a death benefit nomination, is that not part of the original pension and would such a conversion not be effective as a result?

We believe it is very arguable that a death benefit nomination can effectively convert the pension from non-reversionary to reversionary but only if the governing rules of the fund or the pension documents permit it.  SuperCentral’s Governing Rules certainly do permit it.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or info@townsendslaw.com.au to see how we can assist.