You may have SMSF clients that need to take action before 1 July 2017 to ensure they do not exceed the $1.6 million transfer balance cap.

Those affected will need to commute some or all of their superannuation income stream(s) that exceed $1.6 million – either by transferring the excess amount to an accumulation interest within the fund, or by withdrawing it as a lump sum.

However, the difficulty is that some members won’t know the exact value of their holdings and the required commutation amount before 1 July 2017. Accordingly, the ATO has released guidelines to help members prepare commutations.

ATO’s compliance approach

The ATO will accept a pension commutation request made on or before 30 June 2017 if the request and acceptance by the trustee(s):

• Are both made in writing
• Are both finalised before 1 July 2017
• Specifies a methodology that allows the precise quantum of the amount commuted to be calculated (such amount may be ascertained at a later point in time)
• Specifies the superannuation income streams which will be subject to the commutation
• Does not conflict with a similar agreement to commute that the member has agreed to with a trustee of a different superannuation fund
• Is consistent with the governing rules of the superannuation fund.

Where your client has more than one super income stream in the fund, the request and acceptance will need to specify the different income streams that may be covered and the order of priority in which the commutations will occur. 

Deciding which pension should be commuted and in what order can have important tax, estate planning and financial planning implications. The taxable proportion of each super income stream is a consideration due to its impact on future death benefits. Another important consideration may be any pensions that are grandfathered for social security purposes including health care entitlements.

The ATO guidelines only apply to SMSF members who request an amount or amounts to be commuted from their superannuation income stream(s) to avoid exceeding the $1.6 million transfer balance cap. These guidelines do not apply in respect of commutation requests made on or after 1 July 2017.

It’s also important to note that if your client enters into this arrangement with their SMSF, they will not be able to enter into a similar arrangement with any other funds. 

How we can help

For members likely to be affected by the cap, the ATO guidelines require the trustee(s) to determine the amount by which the super income stream(s) exceed $1.6 million as at 30 June 2017, and to commute the excess effective 30 June 2017. 

We have developed a set of documents – a pension commutation request and trustee minute template – based on current law and the ATO guidelines.

• Pension commutation request and minutes
• Instructions for completing the documents

You should consider using these documents for each member of the fund who:

• Is affected, or is likely to be affected, by the $1.6 million transfer balance cap; and 
• Wishes to commute their excess to an accumulation interest within the fund (if your client wishes to withdraw the excess from their fund do not use these documents, please contact us instead for further instructions); and
• Hasn’t yet taken action to comply with the transfer balance cap from 1 July 2017.

It’s important to remember:

• A pension commutation request needs to be completed and accepted by the trustee(s) before 1 July 2017.
• The $1.6 million transfer balance cap applies to the combined value of all of the member's superannuation income streams. The balance of income streams a member may have with other super funds will need to be included to determine the combined income stream value as at 30 June 2017.