The ATO has released new pension commutation guidelines which resolves a practical bind facing SMSF members trying to comply with the $1.6 million transfer balance cap.
Practical Compliance Guideline (PCG) 2017/5 was released by the ATO on the 27 April, explaining how SMSF members with pension balances in excess of $1.6 million can request a pension commutation effective 30 June 2017, even though the amount of their pension excess is not determined until after 30 June 2017.
How pension commutations under PCG 2017/ work
The issuance of this guidance removes the need for the trustees and advisers to attempt to estimate 30 June 2017 member account balances and then nominate a specific dollar value to be commuted prior to 1 July 2017.
To be a valid request (and therefore ensure the member doesn’t breach their transfer balance cap) the commutation must meet the following conditions:
- The commutation request made by the member, and it’s acceptance by the SMSF trustee(s) must be made in writing and documented as a trustee resolution;
- Made before 1 July 2017;
- Specify a method to quantify the amount of the commutation at a later point in time (for example upon the completion of the SMSF financial statements for the year ending 30 June 2017);
- Specify the pension account or accounts subject to the commutation request and where there are multiple pension accounts the order of priority in which the commutations will occur; and
- The request cannot conflict with a similar agreement the member makes with another superannuation fund;
Pension commutation requests made under PCG 2017/ are irrevocable.
What advisers need to do before 30 June 2017
Firstly, advisers need to determine who among their clients will be impacted by the $1.6m Transfer Balance Cap.
Advisers using the services of Superfund Wholesale can request a list of their clients member balances by clicking here and emailing firstname.lastname@example.org.
Advisers will also need to provide written advice to their clients about how to comply with the changes. Key advice areas covered (in addition to pension commutations) could include:
- Treatment of amounts above the $1.6m Transfer Balance Cap (leave in accumulation or withdrawal from super)
- Application of the CGT relief resulting from the pension commutations (options available and recommendation on how to apply the relief)
- Maximising non-concessional and concessional contributions prior to 30 June 2017
- Impact on the estate plan for the SMSF members including potential issues around reversionary pensions
Next the pension commutation requests need to be prepared and signed by the impacted SMSF members and trustees. The commutation requests can be generated on a client by client basis via the Pension Request form on the Superfund Wholesale Adviser Portal or in bulk using the data contained in the member data file available from Superfund Wholesale.
Further resources and templates are available in this Help Centre article: 30 June 2017 Transfer Balance Cap Pension Commutations: PCG 2017/5
We suggest that advisers provide us with a copy of the signed commutation requests prior to 30 June 2017 so an independent record is held on file confirming compliance with PCG 2017/5 in case the fund gets audited in the future.
What will happen after 1 July 2017?
The annual accounts for impacted SMSFs will be completed as normal between July 2017 and April 2018. In addition, where Superfund Wholesale has been provided with the pension commutation requests, we will process the commutations to reduce impacted member balances to $1.6m for Transfer Balance Cap purposes.
We will also liaise with advisers in regards to the application of the CGT relief available where pensions are partially commuted to comply with the $1.6m Transfer Balance Cap.
If you require assistance or additional information in regards to the 1 July 2017 ‘Fair and Sustainable’ super changes, please contact us.