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Pensions

June pension commutations best

SMSF pension stream

Trustees considering commuting and restarting an income stream should cease the pension at the end of the financial year.

A technical specialist has recommended SMSF trustees considering pension commutations do so at the end of the financial year if they are considering a strategy that involves stopping and restarting an income stream.

This course of action will allow the trustee to avoid the administrative pain of having to manage a pro-rata minimum pension payment, SuperGuardian education manager Tim Miller said.

“If you’re going to commute and repurchase [a pension], there’s only one date to do it in my mind, from a common-sense perspective, and that is 30 June,” Miller told delegates at the selfmanagedsuper SMSF Professionals Day 2022 held in Sydney last week.

“The reason to commute on 30 June is that [the trustee] would have already met their minimum [pension payment] for the year.

“One of the biggest mistakes I see is people that commute their pension on 1 July because the requirements from a commutation point of view is you have to pay a pro-rata minimum pension based on the number of days for which the pension was active.”

This means a pension commuted on 1 July will require the fund trustee to pay the minimum pension effectively relating to one day, he said.

According to Miller, this requirement cannot be avoided as the ATO is very particular about its application.

“I can tell you one thing, 100 per cent for sure, the tax office doesn’t base the day on the time of the day you commute the pension,” he noted.

“So you can’t perform a commutation at 9am before the day starts; you’ve got to commute inclusive of that one day.

“It might mean your clients will have to pay $7 or a rounded-up amount or whatever it might actually be to meet their minimum pension obligation for that one day.

“So 30 June is a far better day to commute a pension with a 1 July recommencement.”

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