Issue
Can a taxpayer, a trustee of a self managed superannuation fund (SMSF), pay a defined benefit pension to a reversionary beneficiary under Division 9.2B of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations)?
Decision
Yes. The taxpayer, a trustee of an SMSF is able to pay a defined benefit pension to a reversionary beneficiary under Division 9.2B of the SIS Regulations 1994, provided that the terms and conditions of the pension included the basis of the reversion when the original pension was established, and the original pension was established before or during the transitional period.
Facts
The self managed superannuation fund (SMSF) was established before 12 May 2004.
The primary beneficiary was the sole member of the fund on 11 May 2004.
The primary beneficiary becomes entitled to be paid a defined benefit pension during the transitional period.
The defined benefit pension is to revert to the reversionary beneficiary on the death of the primary beneficiary under terms and conditions clearly set when the pension was established.
The terms and conditions of the pension include the name of the reversionary beneficiary as well as the amount and frequency of the reversionary pension payments.
The primary beneficiary dies after the transitional period.
The pension reverts to the reversionary beneficiary after the death of the primary beneficiary.
Reasons for Decision
A self managed superannuation fund (SMSF) may pay a defined benefit pension if: • the SMSF was established before 12 May 2004; and • the governing rules of the SMSF have not been amended on or after 12 May 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 12 May 2004, even if the first payment is made after 12 May 2004.
Subject to certain transitional rules, an SMSF cannot pay a new defined benefit pension if: • the SMSF was established on or after 12 May 2004; or • the governing rules of the SMSF are amended on or after 12 May 2004 to provide for payment of the pension.
In particular, an SMSF cannot pay a defined benefit pension, even if its governing rules allow for the payment of defined benefit pensions, if they do not set out the terms and conditions of the defined benefit pension proposed to be paid. In that case, a resolution made on or after 12 May 2004, establishing the terms and conditions of the pension, would be regarded as an amendment to provide for the payment of the pension.
However, there is an exception for a transitional period ending on 30 June 2005. This exception allows a regulated superannuation fund that has less than 50 members, including an SMSF, to provide a defined benefit pension to a person only if: • the person was a member of the fund on 11 May 2004; • at any time before 1 July 2005, the person retires on or after attaining age 55 or attains age 65 (even if this occurred before 12 May 2004); • the person becomes entitled to be paid a defined benefit pension after 11 May 2004 and before 1 July 2005; and • the first pension payment is made within 12 months after the day when the person became entitled to the defined benefit pension.
Where the terms and conditions of a pension are established during the transitional period and the transitional rules are satisfied, and these terms and conditions include the terms and conditions of a reversionary pension to be paid to a certain individual, this reversionary pension can potentially be paid without the need to further amend the governing rules.
The terms and conditions that need to be established would include all the terms and conditions of the reversionary pension itself as well as the manner in which the pension is to revert to the reversionary beneficiary on the death of the primary beneficiary. It should be noted that the transitional period to which the ATO ID refers was later changed so that it ended on 31 December 2005 rather than on 30 June 2005