One major consequence of the 2016 Budget changes and the introduction of transfer balance caps is that, by the end of 30 June 2017, the total amount each member has in pension phase must be reduced to $1.6 million.

The ATO has released PCG 2017/5 to outline its requirements to effectively commute these excess amounts. Advisers must take these guidelines into account when preparing the paperwork for clients with pension balances over $1.6 million.

To effectively commute the excess, the ATO, in PCG 2017/5, states there must be a written request by the member and acceptance by the trustee that:

  • is made before 1 July 2017;
  • specifies how the commutation amount is calculated (the ATO acknowledges that it may not be possible to know the precise amount, so it can be the amount over the member’s transfer balance cap);
  • specifies the pension the commutation amount is to come from (and where there is more than one pension, the order of priority);
  • does not conflict with another agreement with another superannuation fund; and
  • cannot be amended or revoked.

The amount of the commutation must be worked out and the accounts processed before the due date of the SMSF’s return for the 2016/17 year.

The ATO’s approach is consistent with the approach we recommend, which is that the member and trustee agree to commute the amount in the member’s pension account above $1.6 million back to accumulation phase.

While this process may seem simple, it is very important that the paperwork is correct. There are a number of traps when drafting commutation documents, including:

  • timing;
  • ensuring minimum yearly pension payments are made prior to the commutation;
  • taking into account pensions in other superannuation funds;
  • properly expressing the amount of the commutation;
  • access to the CGT relief; and
  • where there are multiple pensions.

This approach will provide certainty for SMSF members, compared to attempting to calculate the exact amount to be commuted or relying on the transitional relief that allows pensions of less than $1.7 million to be commuted after 30 June 2017 but before 31 December 2017.