Julie Dolan analyses how the ATO’s treatment of TRIS and pension commutations can benefit certain SMSF trustees.
The Australian Taxation Office’s (ATO) position in SMSF Determination 2013/2 is a payment made as a result of a partial commutation of an account-based pension (other than a transition-to-retirement income stream (TRIS)) counts towards the minimum annual amount required to be paid under paragraph 1.06(9A)(a) in the Superannuation Industry (Supervision) (SIS) Regulations 1994.
This determination was further confirmed by ATO Tax Ruling 2013/57, where it states a partial commutation occurs when a member in receipt of a pension consciously exercises their right to exchange something less than their full entitlement to receive future pension payments for an entitlement to be paid as a lump sum.
As there is still an obligation to continue to pay pension benefits, a partial commutation does not result in the cessation of the pension.
Therefore it has been clear an account-based pension can be partially commuted to a lump sum to enable the recipient to benefit from the low-rate cap amount ($185,000 for the 2015 financial year) as well as the partial commutation payment being counted towards the legislative minimum annual amount.
On 18 September, the ATO, via its webpage on TRIS information, provided the clarification that if the TRIS contains unrestricted non-preserved benefits, the member is able to choose to partially commute the TRIS to cash their unrestricted non-preserved benefits as a lump sum from their TRIS at any time. This then allows the member to also benefit from accessing their low-rate cap. This is extremely effective for members between their preservation age and the age of 60.
It is important to note an election must be made prior to making the commutation and the account balance of the TRIS after the partial commutation must be greater than or equal to the remaining amount of the minimum annual pension payment amount that has to be paid for that financial year. It is also required that a proportion of the minimum pension payment amount be paid prior to the partial commutation.
This amount is equal to the number of days in the financial year prior to the payment divided by the number of days in the year.
The required election is contained under regulation 995-1.03 of the Income Tax Assessment Regulations 1997. The result of this election is to classify the amount as a lump sum rather than a pension and hence be taxed accordingly.
Like the rules relating to account-based pensions, the ATO has clarified that the partial commutation also counts towards the minimum annual pension payment amount, unless it is rolled over within the super system. It does not count towards the maximum annual pension payment limit as per the definition of a TRIS under SIS regulation 6.01.
This regulation specifically “excludes payments by way of commutation” as part of the total payments made in a financial year.
The ATO also confirmed the partial commutation payment must have the same taxable and tax-free proportionate components as those of the separate interest that supports the TRIS when it commenced and the payment can be made by way of cash or an in-specie payment.
The result of this clarification is strategically important. By making the required election, the member is able to use their low tax cap under section 301-20 of the Income Tax Assessment Act 1997, while also having this payment being counted towards the minimum annual required pension payment. It does not count towards the maximum pension payment, therefore it provides a greater level of flexibility and planning for members who have reached preservation age, but not as yet ‘retired’.
