The ATO has provided self-managed super fund (SMSF) members with further guidance on commutation requests made before 1 July 2017 to avoid exceeding the $1.6 million transfer balance cap.
The Tax Office’s Practical Compliance Guideline (PCG) 2017/5 addresses the compliance approach that will be taken by the ATO where a SMSF member requests an amount or amounts to be commuted from their super income stream(s) in order to avoid exceeding the transfer balance cap.
The PCG 2017/5 assists those SMSF members that may not be in a position on 30 June 2017 to know precisely the value of the super interests that support the superannuation income streams. These members can request a pension commutation effective 30 June 2017, which subsequently must be accepted by the trustee of the SMSF. The commutation request will not need to specify the amount of the commutation.
This strategy will prevent SMSF members from having to estimate their excess pension balance and commuting this amount before 30 June 2017.
For a commutation request to be valid it must be consistent with the governing rules of the super fund and the agreement between the member and trustee under which the super income stream is provided.
Additionally, whether and at what time a valid commutation takes effect is a question to be determined by particular circumstances. It must be clear that some or all of the member’s rights to receive future super income stream benefits has been exchanged for a right to receive a lump sum.
The Commissioner will not apply compliance resources to review the commutation request that is made before 1 July 2017 where the request and acceptance to commute:
- are both made in writing. The agreement by the trustee may be documented as a trustee resolution
- are made before 1 July 2017
- specifies a methodology that allows the precise quantum of the amount commuted to be calculated (such amount may be ascertained at a later point in time)
- specifies the super income stream which will be subject to the commutation. Where the request may cover more than one income stream, the request and acceptance will need to specify the different income streams that may be covered and the order of priority in which the commutation will occur, and
- do not conflict with a similar agreement to commute that the member has agreed to with a trustee of a different super fund.
The request and acceptance to commute must be made before 1 July 2017. An agreement to commute cannot be subsequently revoked or altered by the member or trustee of the SMSF after the date the agreement is made. Please contact our office if you require further advice or would like to discuss your options regarding the super reforms.