There are rules regarding the ability to commute. One rule that applies to most SMSF pensions these days is that before commuting a pro-rated pension minimum must be paid, calculated as:
[minimum annual amount] x [days in payment period] ÷ [Days in financial year]
But what happens if the pension is commuted on 1 July? Is a minimum for that one day required? To be even more extreme, what if the pension is commuted at 12:00:01 AM on 1 July? Surely a prorated minimum is not required for having a pension for literally one second?
In practice, many take the answer to be no and don’t pay a minimum. However, is this correct?
The Commissioner has answered this question, albeit in a non-binding forum and some years ago, namely, in the June 2009 meeting of the National Tax Liaison Group, Superannuation Technical Sub-group. The minutes reveal the following question was put to the Commissioner: ‘Is the day of the commutation included in the ‘days in payment period …’
The Commissioner answered this in the affirmative stating:
… where the commutation occurs on 1 July … the Tax Office considers that there is one day in the payment period and a minimum pension or annuity payment representing a one day period must be paid.
This approach means 1 July would also be counted in working out the minimum payment for any new pension immediately commenced from a roll-over of the commutation lump sum.
Accordingly, the Commissioner believes that, even though if commuting a pension at 12:00:01 AM on 1 July of a financial year, a prorated amount must first be paid.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.