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Partial pension commutation stance confusing

The use of partial pension commutations in satisfying the minimum pension payments in an income year is currently unclear following a recent ATO ruling on the matter, according to an SMSF technical expert.

“If I take a partial commutation, call it a lump sum if you want, but the correct terminology is commutation, we know it counts towards the minimum [pension payment requirement] and if I took the full balance I don’t have to worry about taking anything more. I’ve satisfied the pension rules, I get all of my income during the year exempt, and if I’ve taken out an in specie benefit payment, I don’t have to worry,” Colonial First State senior technical services manager Craig Day told the 2015 SMSF Association State Technical Conference in Sydney last week.

“That’s clear in the rulings and the self-managed super funds determinations.”

Day explained the procedure had now been placed in question due to a situation he was made aware of stemming from an ATO audit.

The set of circumstances he was referring to involved an SMSF where the trustee took the minimum annual payment in full as an in specie commutation. The administrator of the fund saw no problem with that approach and claimed a tax exemption for all of the income in the fund’s tax return.

“The ATO are now saying, on review, that because the member fully commuted their annual payment that therefore the pension has ceased,” Day said.

“And that is not supported anywhere in any self-managed super fund examination or tax ruling that I can find.

“What they did say is that if they had paid a couple of income payments after [the commutation], then that would be a partial commutation, which makes no sense whatsoever when you read the self-managed super fund determinations.”

In light of this development, he suggested trustees would be prudent to take both a lump sum and cash payments to satisfy the minimum pension payment obligations.
But he stressed the situation was still worrying.

“My concern when I got this [information] was it is not represented in any of the ATO official documents this year,” he said.

“They started talking about the pension consisting of two elements, but where is that in the legislation? Where is that in tax rules?

“There are a lot of people out there doing this and if [the ATO] has a different interpretation, then we need to know about it.

“If this is just someone in the ATO getting something wrong, and fingers crossed that is the case, but we need some sort of clarification.”

He said he had raised the issue with the SMSF Association so it could be addressed immediately.

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