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A member who has made a Binding Death Benefit Nomination (BDBN) who subsequently commences a pension with a reversionary nomination has effectively varied their BDBN, and the BDBN may be undermined.
Under the ATO’s view, set out in TR 2013/5, a member’s pension ceases for tax law purposes on their death unless an eligible dependant is automatically entitled to receive the pension as a reversionary beneficiary.
A nomination will broadly fail to satisfy the ATO’s strict standard of reversion if any element of discretion arises under the governing rules of the fund in relation to the death benefit.
This means, among other things, that the 12-month deferral in the timing of the credit to the recipient’s transfer balance account will not be available.
Naturally, a binding direction in relation to a member’s death benefits can be recorded in various ways.
For instance, nominations in relation to death benefit pensions are commonly recorded in pension commencement documents, reversionary pension nominations and binding death benefit nominations (BDBNs).
Each of these documents, if appropriately drafted, can broadly be used to bestow (or in some cases, remove) reversionary status on a pension, subject to the terms of the self-managed superannuation fund (SMSF) deed.
But the question must be asked: what happens when there is a conflict or inconsistency between a member’s BDBN and what is set out in their pension/nomination documentation?
In their article in the June issue of Taxation in Australia, William Fettes and Daniel Butler, CTA, (both DBA Lawyers) outline the key considerations for SMSF members and advisers.
The article asks, are the documents binding or otherwise legally effective?, and does the documentation satisfy the ATO’s standard for automatically reversionary pensions?
It also looks at appropriate powers in the SMSF deed, inconsistencies or conflict between documents, and if an ARP nomination defeat a BDBN.
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