Commutation authorities for SMSFs

What is a commutation authority

A commutation authority is a notice issued by the Commissioner of Taxation to a self-managed super fund (SMSF), when an SMSF member has exceeded their transfer balance cap and we have sent them an excess transfer balance determination. They have either:

• not commuted the excess amount in the determination in full by the due date, or
• made an election for us to send a commutation authority to their fund to have the excess amount commuted.

A commutation authority is also sometimes referred to as a Commissioner's Commutation Authority (CCA).

What you need to do if you receive a commutation authority

If you are issued with a commutation authority you must, by the due date on the commutation authority, that is, within 60 days:

• commute the amount stated on the commutation authority to an accumulation account (unless it’s a death benefit income stream), or pay a super lump sum (the commutation authority will detail the amount that must be commuted from a specified income stream for that SMSF member), or
• choose not to comply with the commutation authority because the member is deceased or because we’ve issued it in relation to an income stream that is a capped defined benefit income stream.

You must also:

• send us a Transfer balance account report (TBAR) reporting the details of the commutation or why you have chosen not to comply with the commutation authority
• notify your member in writing that you have complied or not complied with a commutation authority.

Note: The Commissioner doesn’t have discretion to grant you an extension of time to respond to the commutation authority.

For assistance with TBAR, see TBAR instructions for each scenario.

What you need to report on the transfer balance report (TBAR)

The TBAR must report that the SMSF has:

• complied with the commutation authority by commuting the full amount from the income stream stated in the notice
• complied with the commutation authority by commuting the income stream as much as possible – even if this is less that the amount in the commutation authority (this is known as the maximum available release amount)
• chosen not to comply with the commutation authority because either        
  • the member is deceased
  • we issued the commutation authority in relation to a capped defined benefit income stream.

It is important to ensure that the pension payment standards are met when partially or fully commuting an income stream.

What you need to tell your member

You must notify your member in writing (within 60 days of the issue date of the commutation authority) when you comply with a commutation authority and include the following information:

• the member's name and address
• income stream account number in the commutation authority
• the issue date and due date of the commutation authority
• the amount you were required to commute.

If you have commuted an amount in response to the commutation authority you must also include

• the amount you commuted
• the date of the commutation.

If you have chosen not to comply with the commutation authority because it was in relation to a capped defined benefit income stream, you must also include a statement to this effect.

You must also sign the notice you provide your member and declare that the information it contains is 'true and correct'.

Consequences of not responding to the commutation authority by the due date

If you don't commute the required amount by the due date (that is, within 60 days of the issue date of the commutation authority) or tell us why you have not done so (using a TBAR), the income stream will stop being in the retirement phase. This will affect the fund's entitlement to exempt current pension income. You may also be liable for penalties or subject to compliance action.

There is also an administrative penalty if you do not notify your member of your response to the commutation authority within 60 days of the issue of the commutation authority.

Responding to the commutation authority

When you can commute an amount, you should make reasonable efforts to contact the member and discuss their options. For example, whether to retain the commuted amount in an accumulation account or take it as a lump sum. If you cannot contact the member, you should commute the amount in a way that you judge to be in the member's best interests.

Unless the commutation authority relates to a death benefit income stream, the member can choose to keep the commuted amount in an accumulation phase account or cash the amount out of the superannuation system.

If the commutation authority relates to a death benefit income stream, the commuted amount must be cashed out of the superannuation system.

You don’t have authority from us to commute the member’s income stream after the due date on the commutation authority.

Commuting the full amount

You must commute the full amount set out in the commutation authority, including cents, when it is possible to do so.

For assistance with TBAR, see TBAR instructions for each scenario.

Commuting a partial amount

If you can’t commute the full amount stated on the commutation authority because the amount is higher than the value of the interest supporting the income stream, you must commute the value of the interest and close the account. As part of calculating the value of the interest that can be commuted, you should take into account any pro-rata minimum pension payments that need to be met.

You must also lodge a TBAR to tell us you have complied in part.

If the income stream stated in the commutation authority has already ceased (for example, if the member has already exhausted the full value of the interest through pension payments) then you need to lodge a TBAR by the due date to tell us you have complied in part, the commutation amount is nil, and the account is closed.

What to do if the income stream identified in the commutation authority is a legacy or market-linked pension that isn't a capped defined benefit income stream

Certain legacy pensions, including market-linked are not a capped defined benefit income stream (CDBIS) if they started on or after 1 July 2017.

The pension rules that apply in these circumstances have been changed and commenced on 5 April 2022 to allow the commutation of specific legacy and market-linked pensions in order to comply with a commutation authority. This is where a:

• lifetime pension that commenced before and after 1 July 2017, or
• market linked or life expectancy pension or annuity that commenced prior to 1 July, and
• this CDBIS is commuted, and a new market linked, or life expectancy pension or annuity is commenced (no longer a CDBIS).

When the transfer balance account events are reported, and if the member has an excess transfer balance account, then the excess can be commuted from these income streams (market linked, or life expectancy pension or annuity). A commutation can only occur after a Commissioner's commutation authority is issued to the fund. This occurs 60 days after the member has been issued with an excess transfer balance determination if the member is still in excess.

If we issue you with a Commissioner's commutation authority in relation to one of these income streams, you must comply with the authority by commuting the income stream, up to the maximum available and advise the ATO via the TBAR.

What to do if the commutation authority relates to a CDBIS

You can choose not to comply with a commutation authority if it relates to a CDBIS.

If you choose not to comply with a commutation authority because it relates to a CDBIS you must still lodge a TBAR by the due date to tell us you’re choosing not to comply for this reason.

However, as we won’t issue a commutation authority to an SMSF in relation to an income stream you have told us is a CDBIS, you’ll also need to amend your initial reporting to us to advise that the income stream is a CDBIS. Amending your reporting may mean we need to recalculate your member’s transfer balance.

What to do if the member is deceased

You don’t need to comply with a commutation authority in relation to a member who is deceased. However, you must still lodge a TBAR by the due date to tell us you’re choosing not to comply for this reason.

Note: You don’t need to report the death of a member on the TBAR for any other reason.

What to do if the account number for the pension has changed

In some instances, the reference you use to identify an income stream may have changed since the income stream was reported to us. For example, the SMSF has changed software providers and the income stream reported to us as account 123 is now referred to as account 123A.

In these instances, we may send a commutation authority identifying the income stream that needs to be commuted, which uses the account number you initially reported to us.

You’re still required to commute the identified income stream, even though the reference you use has changed.

TBAR instructions for each commutation authority scenario

This table provides detailed instructions on how to complete the paper form of the Transfer balance account report (TBAR), depending on how you are responding to the commutation authority.

If you are not lodging a paper TBAR form, refer to other reporting avenues information below Table 2.

Regardless of which scenario applies to you, the TBAR must be completed on or before the due date of the commutation authority. You must also complete all other relevant information in the TBAR, such as the member’s details, fund’s details, event details, member account details and declarations.

Table 2: Instructions for each scenario on a paper TBAR form

Scenario	Reporting using a paper TBAR
Commuting the amount in full	At Question 12, tick the box Commutation authority – commuted in full. At Question 17, report the date you complied with the commutation authority. At Question 18, report the value of the commutation. You should also complete Question 19 to tell us if you transferred the lump sum to an accumulation account or cashed it out of the superannuation system.
Commuting as much as possible, including when the amount is nil	At Question 12, tick the box Commutation authority – commuted in part. At Question 17, report the date you complied with the commutation authority. At Question 18, report the value of the commutation, including if that amount is nil. Unless the amount is nil, you should also complete Question 19 to tell us if you transferred the lump sum to an accumulation account or cashed it out of the superannuation system. You must also select Closed at Question 21.
Not complying because the commutation authority relates to a capped defined benefit income stream	At Question 12, tick the box Commutation authority – capped defined benefit income stream.
Not complying because the member is deceased	At Question 12, tick the box Commutation authority – deceased.

Other reporting avenues

If you’re using the online form in Online services for business:

• Select Lodgments
• Select Reports and forms
• Select Transfer balance account report (TBAR) from the list. The events in this list are the same as the events in Question 12 on the paper form.

If you’re using a software solution developed by your administrator, you’ll need to follow their instructions to select the relevant event that corresponds to the events in Question 12 on the paper form.

For more information on reporting, see:

• Super transfer balance account report instructions
• Reporting methods (forms) and lodgment.

What to do if you disagree with the commutation authority

You can’t object to a commutation authority and your member can’t direct you not to comply with it.

If you think the amount on the commutation authority doesn’t take into account a commutation by the member then this may be because your member commuted their income stream after the due date on the excess transfer balance (ETB) determination or there was a delay in reporting the commutation to us.

You should provide any missing information or correct any reporting as soon as possible in time for us to revoke the commutation authority before its due date.

If your member disagrees with the way we calculated their excess, then they can seek an extension of time to lodge an objection to the ETB determination. However, this doesn’t remove your obligation to comply with the commutation authority by the due date, once it’s issued.

If an objection is lodged to the ETB determination and we allow the objection in full, then we will revoke or amend the commutation authority, if we are able to do this, by the due date. Otherwise, you’ll still need to action the commutation authority by the due date.

Instances when we may be able to vary or revoke a commutation authority

In limited circumstances we may be able to vary or revoke a commutation authority once we receive and process any outstanding information. For example, if you think the amount on the commutation authority doesn’t take into account a commutation by the member then this may be because your member commuted their income stream after the due date on the ETB determination or there was a delay in reporting the commutation to us.

However, varying your commutation authority won’t give you more time to comply. For example, if we issued a commutation authority with a due date of 30 November and receive information that allows us to vary it on 1 November, you’ll still only have until 30 November to action the varied commutation authority.

What happens after you have complied with the commutation authority

The table below provides information on what we will do next after you have responded to the commutation authority, based on your situation.

Table 3: ATO action on commutation response

Your situation	Our action
You comply with the commutation authority in full	After you lodge a TBAR, we will send your member an ETB tax notice of assessment.
You tell us the member is deceased	After you lodge a TBAR, we will send your member's estate an ETB tax notice of assessment.
You comply with the commutation authority in part and the account is closed, or if you didn’t comply because the income stream is a capped defined benefit income stream	After you lodge a TBAR we will consider whether your member has other retirement phase income streams that are not capped defined benefit income streams. If they do, then we will send commutation authorities to the providers of those income streams until the excess is resolved. If they don’t resolve the excess, we will send your member a Notice of non-commutable excess transfer balance. If we send your member this notice, they will receive a debit in their transfer balance account to resolve their excess transfer balance. Once your member is no longer in excess, we will send them an ETB tax notice of assessment.

Information for SMSFs on commutation authorities, including how to respond and what happens after you respond.