Commutation authority requirements
A commutation authority is a notice the Commissioner issues to a super income stream provider requiring the provider to commute an amount of a specified super income stream. This is issued when we have not received reporting to indicate that the member has voluntarily commuted the amount stated in an excess transfer balance determination.
Your obligations in relation to a commutation authority are detailed in sections 136-80 to 136-90 in Schedule 1 of the TAA.
You must comply with a commutation authority and report to us using the approved form, which is currently the transfer balance account report (TBAR), within 60 days of the notice issue date, telling us whether you have:
- complied with the commutation authority in full, by commuting the full amount stated in the notice (CC1)
- complied with the commutation authority in part, by commuting the maximum available release amount, even if this amount is nil (CC2)
- not complied with the commutation authority because
- the member is deceased (CC3)
- we issued the commutation authority in relation to a capped defined benefit income stream (CC4).
If you do not comply with the commutation authority or tell us why you have not done so, using the approved form, the income stream will stop being in the retirement phase and this will affect entitlement to exempt current pension income. You may also be liable for penalties or subject to compliance action.
For more information, see Transfer balance account report instructions.
Commuting from an income stream with a different account identifier
When we send you a commutation authority it is related to a particular income stream for a member. You can only comply with the commutation authority in relation to that specific income stream.
To help you identify which income stream you need to commute we will provide the member account identifier you used when you reported this income stream to us as a retirement phase event.
If you have changed the account identifiers for this income stream but the income stream itself has never ceased, we expect that you will have completed the associated member account reporting for this change and that you will be able to identify the correct income stream and action the commutation authority.
If the income stream referred to on the commutation authority has actually ceased, you must report to us in the approved form that the maximum available release amount is nil, and the account is closed.
You should not process a commutation authority to remove the commutable amount from a different income stream. If further commutations are required to bring the member back under their transfer balance cap, we may send further commutation authorities to you or to other income stream providers.
Contacting your member when you receive a commutation authority
If you receive a commutation authority, you should make reasonable efforts to contact the member and discuss their options which are to retain the commuted amount in an accumulation account or cash it as a lump sum. If you cannot contact the member, you should commute the amount in the way that you judge to be in the member's best interests. If you require guidance regarding what is in your members' best interests, you should seek this from your regulator.
In addition to reporting to us when you comply with a commutation authority, you must also notify your member. As there is no standard tax form for providing the required information, you can use your own business processes. You will meet the approved form requirements provided you include the following details in the correspondence you send to your member:
- the member's details, including name (include enough member personal information to ensure it is clear to which member the account belongs)
- details from the commutation authority
- issue date
- due date
- income stream account number
- unique super identifier (if applicable)
- member client identifier (if applicable)
- the amount to commute
- details of the lump sum commuted (where a lump sum was paid in accordance with a commutation authority)
- the amount
- the date it was paid.
You must also declare on the correspondence that the information it contains is 'true and correct' and sign it.
Where you did not commute any amount in response to a commutation authority because the maximum available release amount is nil or where you chose not to comply because the member is deceased, you are not required to notify the member (or their estate) of this, however it may be good practice to do so.
Where you chose not to comply because the income stream is a capped defined benefit income stream, you must notify your member of your choice not to commute the amount. Although it is not legally required, it may be good practice to also advise your member of the reason you were unable to comply.
There is 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, when this is required.
Proportioning rules
In contrast to the manner in which you action a release authority, you will need to apply the proportioning rules when actioning a commutation authority, see Calculating components of a super benefit.
A commutation of a super income stream occurs where the member consciously and validly exercises their right to exchange some or all of their entitlement to receive future super income stream benefits for an entitlement to be paid a super lump sum. A commutation also occurs when a super income stream provider converts a super entitlement to a super lump sum in compliance with a commutation authority.
The super lump sum that arises from a commutation may be cashed out of the super system, or can be retained within the super system, that is, transferred back to an accumulation account, subject to the cashing restrictions for super death benefits.
In either instance, the commutation is a super benefit and the proportioning rules in Division 307 of the ITAA 1997 apply. In the instance where the lump sum is paid to a member, the commutation is clearly a super benefit and the proportioning rules apply. In the event that the commuted amount is retained in the super system, the commuted amount is considered to be a super benefit to which the proportioning rules apply by virtue of subsection 307–5(8) of the ITAA 1997 which states that where an amount is transferred from one super interest in a super plan to another super interest in the same plan, the transfer is treated as a payment.
For more information on income streams and transfer balance cap, see:
- TR 2013/5 Income tax: when a super income stream commences and ceases
- LCR 2016/9 Super reform: transfer balance cap.
Commutation authorities for deceased members
Under subsection 136–80(3) of the TAA a super provider can choose not to comply with a commutation authority if the retirement phase recipient has died. In other words, if you are aware the member is deceased, you do not need to action the commutation authority even though you may still be processing the deceased member’s affairs. However, if you have commuted an amount in response to the commutation authority before the member died, this must be reported.
Note: We do not intend to issue a commutation authority where we are aware that an individual is deceased. However, there may be instances where we are not aware or where the member dies between the issue date of the commutation authority and the date the fund actions the commutation authority.
Examples
Example 11: fund commutes the full amount
Member Joan Aitchison receives an excess transfer balance cap determination and does not voluntarily commute the amount within the determination period. The fund then receives a commutation authority for Joan's account and can comply with the commutation authority in full because the account balance is larger than the amount on the commutation authority. The fund commutes the amount by the due date on the commutation authority. The fund does not report an MCO in MATS; the fund lodges a TBAR reporting the commutation as a CC1 and notifies Joan of the details.
End of example
Example 12: fund commutes a partial amount
From example 11, the fund can comply with the commutation authority, but in this case the maximum available release amount is less than the amount on the commutation authority. The fund fully commutes the income stream by the due date and does not report an MCO in MATS. The fund lodges the TBAR reporting a CC2 and notifies Joan.
End of example
Example 13: fund commutes in full and then member dies
From example 11, the fund receives a commutation authority for Joan and can comply with it in full by the due date leaving a residual income stream balance. Joan dies before the fund has reported the commutation authority and the income stream is automatically reversionary to her spouse Peter. The fund lodges a TBAR reporting the CC1 for Joan and notifies Joan's estate. The fund reports nothing further for Joan on her death; the fund reports an IRS event for Peter for the residual income stream value.
End of example
Example 14: member dies prior to the receipt of the commutation authority
From example 13, but the fund receives the commutation authority for Joan after she has died. As the income stream was automatically reversionary to Peter, the fund lodges a TBAR reporting a CC3. The fund chooses not to notify the estate and reports nothing further for Joan on her death. The fund reports the IRS for Peter.
End of example
Example 15: fund actions an MCO then receives a commutation authority prior to reporting
As per example 11, except Joan arranged directly with her fund to commute the amount even though it was after her determination due date had already passed. The fund was not aware of the determination due date, as Joan had not disclosed this, and therefore the fund commuted the amount and reported it as an MCO in MATS.
The fund then receives a commutation authority for Joan's account which had been sent prior to the receipt of the MCO reporting. As the fund is required by law to commute the amount in full or whatever partial amount is available by the due date, a fund staff member contacts Joan to ask whether she would like the amount commuted and paid to her as a lump sum or whether she would like it to remain in an accumulation account. Joan states that she has already reduced her transfer balance account below the cap and does not want the amount commuted at all.
The funds contact us by lodging a request using Super enquiry service and requests information on whether there is likely to be a commutation authority revocation issued. We confirm that it is issuing a commutation authority revocation since receiving further reporting and the fund is not required to action the commutation authority.
End of exampleNote: Assistance from us directly to a fund will be limited to confirmation of reporting that has been received or is being sent to that specific fund. If a member has commuted from another fund to bring their transfer balance account under the cap, we will not be able to advise of this to a different fund. However, we would still be able to advise of any revocation that may be on its way to your fund.
In many instances it would be more effective for the member to check ATO Online or call us to discuss what retirement phase event reporting has occurred prior to a fund making contact with us on behalf of the member.
Example 16: change of account identifiers for the same income stream
Betty starts an income stream, and the fund uses the member account number of 00012345. After a registry system migration, the fund changes the account number for Betty's income stream to ABC123. The fund receives a commutation authority for Betty's account 00012345 and has put systems in place to recognise that account 00012345 is now account ABC123. The fund can comply with the commutation authority in full, as the income stream has not stopped or changed, and commutes the required amount from income stream ABC123 by the due date. The fund does not report an MCO for MATS, it lodges a TBAR reporting a CC1 and uses account number 00012345 to match the commutation authority and avoid further ATO contact questioning the account number. The fund notifies Betty using whichever account number will be most meaningful for her.
End of exampleNote: If your systems do not allow you to report the TBAR with the legacy account number, we understand that you will need to use the new member account number. Keep in mind that we may need to make further contact with you to clarify what has occurred in these instances.
Example 17: fund reports CC1 and then receives a variation to the commutation authority
A fund receives a commutation authority for an account held by John Rochester and commutes the amount in full by the due date. Before the fund lodges the TBAR reporting CC1, the fund receives a variation to the commutation authority which reduces the amount. No further commutation is required. The fund lodges the TBAR reporting CC1 with the original amount as intended and notifies John. Note that the fund may want to let John know that the amount commuted was higher than required by the varied commutation authority and therefore John may have cap space available.
End of example
Example 18: fund receives a commutation authority after the account is closed
As per example 16, but the fund receives the commutation authority for John, but the account is closed because the interest has been exhausted from pension payments. The fund lodges the TBAR reporting CC2, the value is nil and the answer to whether the account is closed is Yes.
Note: This does not satisfy your requirement to report a closed account; you would already have reported this account as 'closed' using the relevant service.
End of example