Pension commutation ambiguity ends

SMSF trustees have been given the assurance they have been seeking to address any uncertainty in regard to the commuting of account-based pensions with the release of the ATO’s Practical Compliance Guideline (PCG) 2017/5, according to a sector technical expert.

“Basically what the ATO is saying is the SMSF member effectively has to acknowledge in writing before 1 July this year that they have an amount in excess of the $1.6 million transfer balance cap and they are going to commute that amount back to the $1.6 million, or whatever amount they nominate, and the trustee has to acknowledge it,” Miller Super Solutions founder Tim Miller toldselfmanagedsuper.

“The member has also got to specify the how and when they intend to do this by saying the amount will be determined upon completion of the 2017 financial statements of the fund.

“This Practical Compliance Guideline certainly gives SMSF members the peace of mind to know this is what we’ve got to do with these account-based pensions and this is how we’re going to deal with it.

“So it should put an end on the question of how to deal with commutations, certainly from an accounting point of view.”

Miller pointed out the guideline will not guarantee all SMSF members will get the process correct, but said he would be very surprised if people with a single fund supporting an income stream now got it wrong.

PCG 2017/5 includes examples of how to make the commutation in three different scenarios, covering off a situation where a member has a single superannuation interest supporting a pension, where a member has multiple pensions within an SMSF, and where a member has more than one pension inside an SMSF, as well as a pension in an Australian Prudential Regulation Authority-regulated fund.

Miller said the ATO’s approach to the issue was a positive development.

“Certainly the ATO has taken quite a practical approach to the implementation because I think it wants it to be as seamless as possible. If it’s not seamless, then it’s all going to fall back on the ATO to report on these problems and have all these other areas, which is a workload I suspect they probably don’t want,” he said.

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