Commutation authorities are issued by the ATO when a member of a SMSF has exceeded their transfer balance cap. A commutation authority will be issued after the member has received an excess transfer balance determination alerting them they have passed the cap.
The transfer balance cap is currently $1.6 million and is applied to the combined total of all superannuation accounts held by an individual. To receive a commutation authority, a SMSF member has either;
- Not commuted the excess amount in the determination in full by the due date, or;
- Has made an election for the ATO to send a commutation authority to their fund to have the excess amount commuted.
After receiving a commutation authority, individuals must then;
- Pay a superannuation lump sum by way of commutation. 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 the ATO issued in relation to an income stream that is a capped defined benefit income stream.
- Send the ATO a transfer balance account report (TBAR) stating 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.
This will need to be done within 60 days of receiving the commutation authority. Though the Commissioner of Taxation issues the authority, they do not have the power to grant an extension of time to respond. If you fail to commute or respond to the ATO regarding the authority, the income stream will stop being in retirement phase, affecting the fund’s entitlement to exempt current pension income. You may also be liable for penalties or subject to compliance action.