Critical steps flagged for documenting commutations
For SMSF clients planning to partially commute amounts above the minimum pension payment, a technical expert has highlighted some important steps for correctly documenting the process.
Speaking in a podcast, SMSF Academy director Aaron Dunn said the changes to the superannuation rules have placed greater focus on how clients take benefits out where they’ve taken more than the minimum pension for that particular year.
Partial commutations will be important for some clients, he explained, because with pension payments there is no debit against the transfer balance cap.
Mr Dunn said practical compliance guide PCG 2017/15 that was issued in April this year by the ATO, provides information on what trustees are required to do in the commissioner’s eyes to ensure they actually have a valid commutation.
While this guidance was provided for members making preparations to comply with the transfer balance cap in the lead up to 30 June, he noted, it also provides a very important framework for how benefit payments should be dealt with from 1 July onwards.
“When we think of partial commutations post 1 July, 2017, in my view, it’s going to be a really important requirement as part of the annual pension review requirements that if you are looking to trigger partial commutations, that you are putting in place the appropriate building blocks that are consistent with what the ATO has already issued as guidance in that PCG 2017/5,” he said.
SMSF practitioners, he said, should therefore ensure that there is a member request and trustee acceptance, with the process is in writing.
The documentation also needs to be done before the payment has been made, he said.
“You [also need to] specify the methodology that allows for the precise quantum of that amount to be commuted,” he said.
It should also specify the income stream from which that commutation is to occur, he said.
“So we have this predetermined framework that we need to ensure that we do. Then when we get to that point in time where the commutation occurs, we then document that accordingly, in so far that we have already put in place our initial requests that have the agreement by the trustee off the member’s request,” he explained.
When the commutation occurs, he said, the trustee will need to confirm the payment and then notify to the member that the commutation has occurred, which would also include, the transfer balance cap reporting, which would be a debit against that member’s transfer balance account.
“Subject to the timing of that, we’re either looking at the concession that exists in the current year to the 1 July 2018, or from 1 July 2018, we have this $1 million dollar threshold that we need to consider on a member’s total superannuation balance to work out whether the fund needs to report on an annual basis or 28 days after the end of the quarter,” said Mr Dunn.