Taking money out of your SMSF super can only occur once you meet certain conditions, such as age and an event like retirement, so then you start an income stream from your super. Once you have the income stream going, there is a possibility to take extra out as a lump sum, also known as a commutation.
The ATO (Australian Tax Office) explains more –
Commutation generally refers to the process of converting a SMSF pension or annuity into a lump sum payment. This payment can be paid to the beneficiary, rolled over to another product within the same super fund, or rolled over to another super fund.
Each commutation is required to be reported to us as a transfer balance cap event on a transfer balance account report (TBAR).
Making a large pension drawdown (rather than partially commuting) does not reduce your transfer balance and would not bring you under your transfer balance cap. To reduce your transfer balance, you must commute an amount of your super income stream.
From 1 July 2017, a number of new super rules need to be considered when actioning a request to commute a pension:
- Partial commutations no longer count towards the annual minimum pension payment amount;
- Where the commutation is for the full amount of the pension, trustees must ensure the minimum pension amount has been paid before actioning the commutation;
- Where the commutation is only partial, trustees must ensure the minimum amount is paid before commutation, or that sufficient assets remain to meet the minimum pension payment standards for that year, based on the original value of the income stream at the start of the year.
The requirement to make a minimum payment prior to commutation does not apply where:
- The commutation arises on the death of a member; or
- The sole purpose of the commutation is to
- pay a super contributions surcharge liability
- give effect to a payment split under the family law provisions
- give effect to a client’s right to return a financial product under the corporations law provisions.
(See Electing to treat a pension payment as a lump sum for more detail).
If a pension that commenced on or after 20 September 2007 is to be commuted in full, the SMSF must ensure at least a minimum amount is paid from the pension beforehand. This is because the pension ceases at the time the decision is documented to fully commute.
The minimum payment must occur in the same financial year as the commutation.
The amount paid must be at least the pro rata of the minimum annual payment amount.
For pensions commencing in the same financial year they are commuted, the pro-rata minimum annual payment amount is calculated using the number of days from the commencement day of the pension, to the day it is commuted.
Pro rata minimum payment amount = minimum annual payment amount × days from the commencement day to the day pension commuted ÷ 365 (or 366 in a leap year).
A partial commutation of an SMSF account-based pension does not count towards the minimum pension payment.
Where the super income stream is partially commuted, the value of the super interest supporting the super income stream is reduced.
It is important that trustees prepare and keep records of all decisions made, including those in relation to member payments. These decisions must be documented before the payment is actually made. This is particularly important in relation to the type of payment being made (ie commutation or a pension payment).
Each commutation will need to be reported to us as a transfer balance cap event on a TBAR and for some trustees this may mean more events to report 28 days after the end of the quarter in which they happened.
At the time the partial commutation is made, the trustee will need to ensure that they have already satisfied the minimum pension requirements, or that sufficient assets remain to meet the minimum pension payment standards for that year, based on the original value of that income stream.
See examples for Full and Partial commutations on the ATO site.
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