Introduction: Graeme Colley, a respected educator, policy advisor, and technical expert with over 30 years’ experience in taxation and superannuation.
You can also watch his latest webinar here.
At the end of our latest SMSF Insights webinar we were asked about the implications of Div 296 tax and reversionary pensions. Graeme has shared yet another great blog post sharing his insights on this topic.
Pensions which automatically revert to a beneficiary on the death of the pensioner are preferred by advisers. The main reason is that the value of the reversionary pension at the time of death is not counted against the beneficiary’s Transfer Balance Cap (TBC) until 12 months after the original pensioner’s death. This provides the reversionary beneficiary time to review their situation so that they can restructure their superannuation, if required. However, with the introduction of Division 296 tax from 1 July 2026 it is worthwhile to revisit the benefit of reversionary pensions.
Unlike the concession that allows deferral of the reversionary pension being counted against the beneficiary’s TBC for 12 months from commencement, the same does not apply for Div 296 purposes. The value of the reversionary pension from the time of the original pensioner’s death is included in the member’s Total Superannuation Balance (TSB). The balance of the TSB as at 30 June at the end of each income year is used to determine whether the reversioner has a TSB in excess of the relevant Div 296 thresholds.
For the 2026-27 income year the reversioner’s TSB as at 30 June 2027 will be used to determine whether they exceed the relevant threshold. However, for the 2027-28 and future years the greater of the balance on 30 June in the previous financial year or at the end of the current financial year will be used. This balance is used in the calculation to determine the proportion of the member’s TSB that lies above the $3 million or $10 million threshold.
Division 296 tax is levied on a member’s ‘realised income’, multiplied by the proportion of the member’s TSB that lies above the relevant threshold and multiplied by the tax rate that applies. That is 15% on TSBs above $3 million and 10% on TSBs above $10 million.
Example
Tony is in receipt of a pension which automatically reverts to his spouse Joanne on his death. Tony dies on 30 October 2026 and the balance of the reversionary pension to which Joanne is entitled is $2 million. On 30 June 2027 Joanne’s TSB is valued at $4.5 million consisting of a pension balance of $2.2 million and an accumulation balance of $2.3 million.
Joanne will be liable for Div 296 tax as her TSB on 30 June 2027 will exceed the $3 million threshold by $1.5 million. The proportion of Joanne’s TSB above the threshold is 33.33%. The income earned by the fund during the year consists of $100,000 net exempt pension income and $200,000 net income on her accumulation balance in the fund.
Joanne’s Div 296 tax liability for the 2026-27 income year will be:
$300,000 × 33.33% ×15%=$14,998.50
Note: For purposes of Joanne’s Transfer Balance Cap, the balance of the reversionary pension as at Tony’s death as at 30 October 2026 will not be counted until 30 October 2027.
You can also read a more in depth overview of DIvision 296 in another of Graeme’s blogs here.
If you’d like to speak to one of the Cloudoffis experts, you can reach out here.
