The ATO has issued a reminder to the SMSF sector as to how commutation authorities should be treated and acted upon.
The regulator’s clarification came via CRT Alert 086/2018 and was in response to signs it was seeing where additional reporting obligations and adverse outcomes were arising directly from the treatment of commutation authorities.
A commutation authority is a notice issued by the ATO to an SMSF when a member has exceeded their transfer balance cap and the regulator has previously sent them an excess transfer balance determination. It means the SMSF in question has not commuted the excess amount in the determination in full by the due date or made an election for the ATO to send a commutation authority to their fund to have the excess amount commuted.
CRT Alert 086/2018 stresses a commutation authority does not authorise the SMSF trustees to commute the member’s income stream after the due date.
The alert also stipulates the SMSF trustees must comply with the commutation authority by the due date even if the commutation authority is in relation to a small amount, unless the relevant member has died or the commutation authority involves a capped defined benefit income stream.
Further, the ATO points out SMSF trustees are required to report their response to the commutation authority even if they are not able to commute the full amount specified in the commutation authority, due perhaps to an insufficient level of assets, or they are not commuting an amount because the member has passed away or a capped defined benefit income stream is involved.
In addition, CRT Alert 086/2018 states trustees should let the ATO know they have partially complied with a commutation authority if they are not able to commute any amount because the commutation authority was issued after the member’s account had been closed.
Finally, the ATO has reminded trustees to let it know in a timely manner if a member-initiated commutation had taken place before the issue date of the commutation authority.
CRT Alert 086/2018 also served as notification that the ATO will now be changing the address used to send commutation authorities to the postal address of the SMSF.