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ATO statistics show pension commutation confusion

commuting pension obligations

More trustees are failing to meet minimum pension payment standards suggesting many commuting a pension do not fully understand their obligations.

An increase in the number of trustees failing to meet pension payment standards in the 2018 financial year shows many individuals that are commuting their pension may not understand their obligations, the ATO has said.

Citing a recent ATO report on the SMSF sector for the 2018 financial year, ATO SMSF segment deputy commissioner Steven Keating pointed out a sharp increase in the number of funds failing to meet the minimum pension payment standards, which he said indicated many trustees did not have a full understanding of their responsibilities when actioning a pension commutation.

“In the 2017/18 year, [the number of funds not meeting pension payment standards] increased to 450 SMSFs compared to 187 funds the previous year,” Keating said during a Smarter SMSF webinar yesterday.

“This suggests to us that trustees who may be paid lump sums for accumulation phase or commuting an income stream because the member has exceeded the transfer balance cap (TBC) may not be properly understanding their obligations.”

He also highlighted the importance of documentation, noting the decision to exchange an income stream to be paid as a lump sum needed to be documented prior to the payment being made in order for the commutation to be valid.

“Going through the documentation process also gives the trustee an opportunity to ensure that the minimum payment standards are met,” he added.

“There are TBC as well as exempt current pension income tax consequences if a pension fails to meet the standards and these can lead to more and more complex transfer balance account reporting obligations in the future.”

Last month, following the Treasury Laws Amendment (2019 Measures No 3) Bill being passed through the Senate, the ATO said SMSFs would need to examine if they were required to amend reporting related to a member’s transfer balance account where they had commuted a market-linked pension that was a capped defined benefit income stream.

In May, the regulator noted SMSF trustees relying on property assets to fund their pensions would still be expected to draw down the revised minimum amount, even if income from those assets was low, or risk losing their exempt current pension income status.

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