Update 01/07/2017: This strategy can no longer be used from the 2017/18 financial year onwards.
Update 18/12/2015: ATO has released a private binding ruling stating that cash restrictions don't need to be met for a person under 60 on a TRIS to elect to take a lump sum payment and meet the minimum 4% drawdown.
More information in this article here: http://www.smsfadviseronline.com.au/news/13572-clarity-for-smsfs-with-new-tris-ruling
When a member commences a pension in a SMSF they are required to draw pension payments.
For members over the age of 60 there is no tax payable on these payments.
Those aged under 60 at the time the payment is made will pay tax on the taxable portion of the payment at their marginal tax rates.
Interestingly, there is an allowance under section 995-1.03 of the Income Tax Assessment Act allowing pension payments to be treated as lump sum payments.
For this to occur an election must be made by the member to the fund prior to the payment being made.
This means that the payment will then count towards the lump sum cap (for the 2015-16 year this cap is $195,000).
If the individual has not used their lump sum cap then this payment will be offset and not be added to their taxable income.
In the accounts of the Superfund this lump sum payment will be treated as a partial commutation of the pension.
For the member to take a lump sum payment they must have satisfied a condition of release (which removes the cashing restriction).
For a member with an account based pension the cashing restriction will have been removed.
If a member has a Transition to Retirement Income Stream they can only use this election to the extent of any unrestricted non-preserved components within their pension balance.
SMSFD 2014/1 has further clarified that a payment made as a partial commutation of a pension will count toward the minimum pension requirement for that pension.
Also for a member with a Transition to Retirement Income Stream the partial commutation will not count toward their maximum annual amount.
Consideration should still be given to withholding obligations under these elections if there is insufficient balance left under the individuals lump sum cap.
Prior to the partial commutation of a pension it is essential that all transactions are processed and up to date, also that all assets within the fund are reflected at their correct market value.
Intello undertake monthly processing of all funds under their standard offerings and utilise Class Super as the Accounting platform.
The daily data feeds into Class Super ensure that all listed assets are correctly reflected at market value allowing you to take advantage of this and many more planning opportunities.