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ATO clarifies pension commutation rules

Tim Miller, founder of Miller Super Solutions.

Tim Miller, founder of Miller Super Solutions.

The ATO has issued Practical Compliance Guideline (PCG) 2017/5 demonstrating the approach it will take in regard to the commutation of pensions for the 2017 financial year in an effort to comply with the newly imposed $1.6 million transfer balance cap.

In short, the regulator has announced it will allow SMSF members to notify the fund trustees in writing of their intention to commute part or all of an existing pension to ensure the balance in their pension account is below the $1.6 million threshold before 1 July 2017.

Under the guideline, members will not have to specify the amount they wish to commute, but will have to specify a methodology that will be used to determine this final amount as well as which pension or pensions they will be looking to make a partial or full commutation from in the instance of an individual having multiple income streams.

Further, the amount of the commutation has to be calculated by the trustee and the SMSF and reflected in the fund’s annual accounts for the 2017 financial year no later than the date by which the SMSF’s annual return for the 2017 financial year is due.

To clarify how the process will work, PCG 2017/5 includes how a commutation would work in three different scenarios.

The first covers a situation where a member has a single superannuation interest supporting a pension, the second a situation where a member has multiple pensions within an SMSF, and the third a situation where a member has more than one pension inside an SMSF, as well as a pension in an Australian Prudential Regulation Authority-regulated fund.

Commenting on the ATO instruction, Miller Super Solutions founder Tim Miller said: “This PCG 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.”

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