Aaron Dunn, CEO of Smarter SMSF, has said in a recent online update that the timing of documentation of a pension indicates not just a member’s preference to commute, but also that there is a time frame that needs to be recognised that enables accurate calculation to occur.
Tim Miller, technical and education manager for Smarter SMSF, added that because of the capacity that is available for fund members to commute their pension, many people will make a prospective decision to commute on a date in the future and won’t necessarily know the value of the commutation.
“However, they will know a lot of the critical information, such as the 30 June valuation to determine the pro rata minimum requirements and then if they prospectively recognise a date in the future, they can calculate the minimum requirement up until that date,” Miller said.
“There will also be advisers that will know that the client has taken the minimum, and then determine what the valuation for the commutation is later.
“We recognise that there’s an oral request, usually from the member to the trustee and then follow that up with the written request by the trustee to the member to make the request to commute, and then subsequently, give the capacity to provide details of the valuation of the commutation at a later point, noting its importance for TBAR purposes.”
However, there may be other clients who won’t have an understanding even of the 30 June last year valuations but may want to do a commutation.
“Similarly, they can put their request in, and within that, the trustees can then resolve to advise them of the amount to be rolled over as soon as that becomes available, obviously putting some time pressure on themselves to be able to do everything appropriate from a TBAR point of view,” Miller said.
“We’re ultimately accommodating those that know everything right now with their balances to be able to commute, and those that maybe have some information and those that have no information. The key is recognising that in most instances, the member is going to make an oral request first, via their adviser, or through discussions with their adviser, to actually commute the pension.”
Dunn said this is an important process in TR 2013/5, which outlined what constitutes a valid commutation and the steps that need to occur in that process.
“As an industry, we don’t want to be, and should never be, backdating documents and decisions that we do see quite regularly in terms of some standard templates that get generated,” he said.
“You overcome that issue by specifically drafting documents in a way that acknowledges that there had been some previous discussion and acknowledgement of the decision, recognising full well that there are still things that need to be done.”
When a request is made, it links back and can be signed comfortably, noting that it is the specific day on which it is being done.
“The resolutions that follow thereafter by the trustee are also a reflection of what’s happening on that specified day, acknowledging all the things that they need to work through to get to the formal position where that commutation will occur,” Dunn said.
Miller added that following the changes in regulations late last year, there was now a five-year window in which to commute a pension and there is no urgency to do so as yet.
“The earliest date that you could have commuted a pension was 7 December 2024, and although we’ve already done some commutation in that first week, for everybody else, and particularly those with asset-test exempt pensions, you don’t want to be using a current day because there’s nothing yet from the ATO with regards to debt waivers and things from a social security point of view,” he said.
“For this reason, a prospective decision is going to be in the best interest for all parties.”
