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When should a TRIS be commuted: 30 June or 1 July?

TRISWe suspect that many will want to commute their transition to retirement income streams. However, when should these TRISs be commuted: 30 June or 1 July?

The short answer is 30 June. The reasoning is as follows.

Background

There are rules regarding the ability to commute pensions (including TRISs). 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?

ATO’s view

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.

Other considerations

In light of the above, if commuting a TRIS on 1 July, a prorated minimum should first be paid. Accordingly, I suspect that those rolling back a TRIS might wish to do so on 30 June in order to avoid the practical difficulty of having to pay a prorated minimum first.

Other considerations before deciding to commute include:

  • Under current law, if the TRIS assets were segregated current pension assets as at 9 November 2016, such a commutation needs to occur anyway before 1 July 2017 if the assets are to be eligible for CGT relief under s 294‑110 of the Income Tax (Transitional Provisions) Act 1997(Cth). (However, there is a proposal to relax this provision so that no commutation is necessary in order to be eligible for segregated CGT relief.)
  • Will the lump sum resulting from commutation be internally rolled back to accumulation and mix with other benefits? If so, are you comfortable with the implications of taxable component being irrevocably mixed with tax free component?
  • Naturally, it is important to properly document any commutation and to comply with any specific provisions of the fund’s governing rules.
  • Part IVA, the promoter penalty and the AFSL regime must all be considered too,

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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.

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