The Superannuation Technical Sub Committee March 2013 notes have some useful comments on commuting a SISR 1.06(6) commutable lifetime pension in order to commence an account-based pension (ABP). Last year, ATO ID 2012/84 provided the ATO's view about non-commutable SISR 1.06(2) lifetime pensions.
With a SISR 1.06(6) commutable lifetime pension it has a ceiling on the amount of the lump sum that can be paid - determined by applying the appropriate pension valuation factor under Scedule 1B. (These can be found in the NetActuary "Reference" tab of the website).
The discussion, in essence, is about how the monies left over after the commutation should be treated. The commutation amount up to the limit is non-controversial. There is no requirement that the lump sum payable from the commutation is applied to commence any particular kind of pension and therefore can be used to commence an ABP. No matter what the rules of the fund say, the commutation amount cannot be higher than the Schedule 1B limit and must meet the SIS Regulations.
With this logic, the ATO indicate they would treat any excess amount as assessable concessional contributions. In other words, it is not one of the exemptions in sub-paragraph 292-25.01(4) of the ITAR 1997.
The minutes contain this comment from the ATO:
The ATO also reiterated that in applying the words "on the commutation" in sub-paragraph 292-25.01(4)(b)(ii)(B) of the ITAR 1997 as discussed in ATO ID 2012-84, the ATO takes the view that there must be a greater connection between the relevant allocation to commence a new pension and the commutation than that the allocation merely occurs in time after the commutation. That is, more than a temporal connection is required."
The above is the cautious view that NetActuary has always adopted with these commutations of defined pensions. The more liberal view seems dead in the water. I imagine some commutations could end up with a nasty excess contribution tax shock.
This blog item has too many tax and legislation references. We are going to try and write the next one without a single such reference!
The NetActuary Team