Reversion of a Pension to Taxable Phase

The ATO has taken the view that the super interest supporting the pension will cease to be in exempt phase when the member who is receiving the pension dies.  The super interest will then revert to taxable phase.  This is not a new or novel position.  The ATO has previously indicated this view.  This is one reason why pensions are often established as reversionary pensions (sometimes called auto reversionary pensions). 

A reversionary pension is simply a pension which on the death of the primary pensioner, transfers (as of right and not by reason of any trustee decision) to a nominated person – called the reversionary beneficiary.  The advantage of a reversionary pension is that the death of the primary pensioner does not cause the super interest supporting the pension to revert to taxable phase.  Typically, the primary pensioner and reversionary pensioner will be spouses.

Since 2007, there have been restrictions on who can be named as a reversionary beneficiary.

The interesting aspect of the Draft Ruling is that the Ruling proposes that a binding death benefit nomination may operate in a similar fashion to a nomination of a reversionary beneficiary.  If the binding death benefit nomination nominates a person who is entitled to continue to receive the pension (eg a spouse or a child of the deceased member who is under age 18) and the nomination specifies that the benefit must continue to be paid as a pension, then as the trustee has no discretion and the nomination operates immediately on the death of the member, the super interest will remain in pension phase.