There are rules regarding the ability to commute. One rule that applies to most SMSF pensions these days is that before commuting, a prorated 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 July 1? Is a minimum for that one day required? To be even more extreme, what if the pension is commuted on 12:00:01 AM on July 1? 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 that 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 July 1 of a financial year, a prorated amount must first be paid.
The above is an extract from an article from Bryce Figot of DBA Lawyers published in the April 2015 print version of Professional Planner Magazine.