Tax Office administration of SMSFs and defined benefit pensions in light of SD 2004/1 and ATOID 2005/159

Superannuation Determination SD 2004/1 states that the governing rules of an SMSF cannot be amended on or after 12May 2004 (otherwise than in accordance with the transitional relief) to provide for the payment a defined benefit pension (DBP).

ATOID 2005/159 provides that the trustee of a self managed superannuation fund (SMSF) may pay a DBP to a reversionary beneficiary under Division 9.2B of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR) in certain circumstances. This is where the terms and conditions of the DBP (including the terms and conditions of the reversionary pension itself to be paid to a certain individual) are established during the transitional period (up to 31December 2005) and the transitional rules are satisfied.

ID 2005/159 suggests a new pension is created where a change in reversionary beneficiary occurs, e.g., Dad has a DBP and Mum is the reversionary beneficiary and Mum dies. Dad then makes his son the reversionary beneficiary instead and this is likely to be regarded a new pension in light of ID 2005/159.

This can result in adverse consequences to the family and could result in a loss of transitional relief. This has the effect of introducing retroactive legislative change as there are many with DBPs that commenced prior to the 11May 2004 changes to the law governing the provision of DBPs and it is likely that many more will commence prior to the expiry of the DBP transitional relief on 31December 2005.

Many in industry view the Tax Office position as hard line and untenable at law. Indeed, a sympathetic approach should be taken as the above issue will generally only arise in relation to the death of a person. Hopefully, the DBP rules in this regard will be clarified by Treasury (the DBP consultative report promised in April 2005 still has to issue).

Would the Tax Office please confirm:

(a) whether a reversionary DBP can be paid to a dependant, who is not named as a reversionary beneficiary either at the commencement of the DBP or after the transitional period, where the named reversionary beneficiary predeceases the pensioner? Can the Tax Office please provide reasons supporting its stance if it does not think that this flexibility exists?

Response

The Tax Office view was published in SD 2004/1. A self managed superannuation fund (SMSF) may provide a new defined benefit pension if:

  • the SMSF was established before 12May 2004, and
  • the governing rules of the SMSF have not been amended on or after 12May 2004 to provide for the payment of the pension.

An SMSF may continue to pay a defined benefit pension where the term of the pension has commenced or where the entitlement to the pension has been established before 12May 2004, even if the first payment is not made until on or after 12May 2004.

An SMSF cannot provide a new defined benefit pension, even if its governing rules allow generally for the payment of defined benefit pensions, if they do not set out the precise terms and conditions of the defined benefit pension proposed to be paid. Any resolution made on or after 12May 2004, establishing the terms and conditions of the pension, is regarded as an amendment to provide for the payment of the pension.

Where a person is not named as a reversionary beneficiary prior to the end of the transitional period, their entitlement to a reversionary benefit could not have been established. Where the governing rules are amended to provide for the payment of the pension to this new person, the provisions will apply to prohibit the establishment of the new pension. This element is a question of fact.

Meeting discussion

The final sentence of the second last paragraph of the response to part a) of this item was deleted at the request of members. Members thought the statement that "the Tax Office view had received broad industry support" was not accurate. The Commissioner agreed to delete the sentence but noted that the Tax Office had received support for its administration in this area.

(b) whether a DBP can be paid to a dependant who is named as a reversionary beneficiary, but who does not become a member of the SMSF (in their capacity as reversionary beneficiary) until the death of the pensioner?

Response

The Tax Office view was published in ATOID 2005/159. There is no requirement for a reversionary beneficiary to be a member of the SMSF. The terms and conditions of the pension must allow for the payment to the reversionary beneficiary, without the need to further amend the governing rules.

Furthermore, we are concerned that the Tax Office's positions in SD2004/1 and ID 2005/159 conflict with other available Tax Office publications/determinations and APRA's approach to what constitutes the governing rules of a superannuation fund. For example:

  • the Tax Office's position in SD2004/1 and ID 2005/159 appears to conflict with its position in ID 2003/60. ID 2003/60 considered that it was appropriate to redetermine the 'relevant number' under 27H ITAA 1936 where a taxpayer's pension becomes non-reversionary following a divorce or subsequently becomes reversionary upon remarriage. There was no mention of a new pension being created in ID 2003/60
  • the Tax Office's position in SD2004/1 and ID 2005/159 is also understood to conflict with APRA's approach in relation to what constitutes the governing rules of a superannuation fund for s10(1) of the Superannuation Industry (Supervision) Act 1993 ('SISA') purposes. Would the Tax Office please advise:

(c) if it considers that the governing rules of a SMSF includes all documents that relate to that fund (eg, trustee resolutions, actuarial reports, pension documents, etc) rather than the trust deed and if so, on what authority it relies for this position?

Response

As explained in paragraph 16 of SD 2004/1, the governing rules of a fund are very broadly defined in the legislation to mean:

a. any rules contained in a trust instrument, other document or legislation, or combination of them; or

b. any unwritten rules;

governing the establishment or operation of the fund.

This is not a "hard line" Tax Office view but the words in the law. Ignoring this guidance in the law would render the amending provisions inoperative. The question also suggests APRA is of a different view. As is always the case in relation to provisions such as these, APRA was involved in the drafting of all of these documents.

(d) whether it can reconcile its position in SD2004/1 and ID 2005/159 with its position in ID 2003/60?

Response

ATOID 2003/60 deals with a different question and set of facts. As a result of a taxpayer's divorce the former spouse will no longer be paid a reversionary pension. The ATOID deals only with the question of the undeducted purchase price. There were no amendments to the governing rules. There is no inconsistency between this ATOID and SD 2004/1 or ATOID 2005/159.

(e) whether it intends to apply the view in SD2004/1 across the board to any other pension (other than a DBP) or for any other reason, or was the view in SD2004/1 merely intended to minimise any DBP activity that sought to rely solely on the 11May 2004 transitional relief?

Response

The provisions apply to defined benefit pensions. The Tax Office view in SD 2004/1 explains these provisions. The intent of the amendments is to prohibit the provision of defined benefit pensions by funds with less than 50 members without affecting those funds already paying a defined benefit pension. The Tax Office view is the amendments are effective and the intent has been achieved. This still allows these funds the flexibility to offer account-based pensions such as allocated pensions and the new market linked income streams.

Last modified: 12 Sep 2007QC 18658