What to do when you receive a Commutation Authority from the ATO

Commutation Authorities are issued to SMSF members where they have received an Excess Transfer Balance Determination[1] from the ATO and they subsequently fail to commute the excess by the due date or have otherwise opted for a Commutation Authority to be issued to their fund so it can take the required steps.

The ATO recently released further information on its website relating to what trustees can do if they receive a Commutation Authority, what happens if they fail to comply and if they disagree with a Commutation Authority. This article outlines the latest information.

 

[1] which notifies the member that they have exceeded their transfer balance cap, being the $1.6million dollar cap imposed on the amount a member can hold across all their pension phase accounts in super.

 
  1. Commuting full or partial amounts

The Commutation Authority requires the fund to effect a commutation of the excess amount by the deadline stated. The ATO does not authorise a commutation after the deadline in the Commutation Authority.

The trustee must commute the full amount stated in the Commutation Authority. If a full commutation is not possible - for example, where the interest supporting the income stream is less than the value of the amount required to be commuted - then a partial commutation may be effected. This means the value of the interest is commuted and the account is closed.

When making a partial commutation, this must be notified in the Transfer Balance Account Report (TBAR) and must set out why the Commutation Authority has been partly complied with. Our earlier article on TBARs can be found here.

The trustee should discuss with the member whether to commute the amount into the accumulation account (retaining the concessional tax treatment) or as a lump sum outside of super.

  1. Notify member of commutation

The trustee must sign a written declaration notifying the member, in relation to the amount being commuted and the details of the Commutation Authority. This must be completed no later than 60 days after the issue date of the Commutation Authority. The trustee may otherwise face an administrative penalty.

  1. What if the member is deceased?

If a Commutation Authority has been received in respect of a deceased member, then the trustee is not required to comply. However, a TBAR must still be lodged and specify that the Commutation Authority has not been complied with for this reason.

  1. What if you don’t respond in time?

If you fail to commute the amount required by the Commutation Authority, or otherwise fail to state why you refuse to comply (using a TBAR) – then the income stream will cease to be in retirement phase. This means the income stream is no longer in the tax exempt environment. You may also be subject to penalties for non-compliance.

  1. How to complete the TBAR after commuting

When a Commutation Authority has been issued to a member, a TBAR must be completed and lodged with the ATO no matter whether a commutation is effected in full, partially or not at all. The TBAR must be lodged before the due date specified in the Commutation Authority. The TBAR must specify the member’s details, fund’s details, event details, account details and declarations by the trustee.

  1. Varying or revoking a Commutation Authority

If you disagree with a Commutation Authority you cannot object to it and the member cannot direct the trustee not to comply with it. In limited circumstances the ATO may revoke or vary a Commutation Authority once any outstanding information is received and processed e.g. where a commutation has already been effected and there was a delay in reporting to the ATO. However, this will not give the trustee more time to comply with the Commutation Authority.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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