Brief: considering the published views of the ATO on other types of defined pension the commutation value of life expectancy pensions can be the value of the remaining pension payments or the whole account balance up to the SIS Schedule 1B limit. Centrelink/DVA will probably expect you to use the whole account balance - be sure to consult with Centrelink/DVA before making changes.
Life-expectancy pensions are prescribed by the SIS Act under regulation 1.06(7). Asset-test exempt life expectancy income streams are life expectancy pensions that have been granted asset-test exemption under the provisions of the Social Security Act 1991, section 9B.
There are three issues to consider when selecting a commutation value:
The SIS Act does not offer a clear-cut method for determining the commutation value. SIS Reg 1.06(7) specifies the following:
SIS Reg 1.06(7)(i) ... if the pension is commuted, the commuted amount cannot exceed the benefit that was payable immediately before the commutation; ...
The precise meaning of 'benefit' is unclear. It could mean the value of pension payments, but 'benefit' has not been applied in that sub-regulation to the definition of the payment amounts. Instead it is used throughout regulation 1.06 for various purposes. The following extracts are instructive:
SIS Reg 1.06(1) ... A benefit is taken to be a pension for the purposes of the Act if ...and
SIS Reg 1.06(7)(g)(v) ... the superannuation lump sum resulting from the commutation is transferred directly to the purchase of another benefit ...
We will proceed in this discussion by noting that the purpose of the commutation is to change the pension from one form into another, not to cash-out the pension. Accordingly, 'benefit' is taken to mean the entirety of the pension.
In addition, SIS Reg 1.08 is applicable:
SIS Reg 1.08(1) ... it is a standard applicable to the operation of a regulated superannuation fund that the fund must not use a factor, for converting a prescribed pension to a lump sum, that is greater than the pension valuation factor that would apply under Schedule 1B ...SIS Reg 1.06(7) does not compel the use of a factor, but Reg 1.08 implies that the value resulting from applying the schedule 1B factor is the highest acceptable commutation value.
Not much.
If (lots of emphasis on 'if') the ATO's reasoning in ID 2015/22 can be applied to life expectancy pensions then there will be no taxation consequences for using one of:
bearing in mind that exceeding the SIS Schedule 1B limit may trigger non-compliance with the SIS Act, as noted above. It has to be remembered that ID 2015/22 deals with the commutation of a lifetime pension. However, the legislation and points-of-view the ATO used in formulating that decision are:
It must also be emphasised that ID 2015/22 is an interpretive decision, not a ruling, and it addresses the question of taxation. It does not directly answer the question: what does the SIS Act say about the permitted commutation value? Although the ITAA and SIS Act are closely related they aren't identical. This leaves the ATO scope to alter their decision or to develop a different one for life expectancy pensions.
But the ATO, as regulator of SMSFs, has offered no other guidance.
Pensions in this category must comply with both the SIS Act and Social Security Act.
The Social Security Act 1991 imposes a similar requirement to the SIS Act:
There is no equivalent of the SIS Schedule 1B limit in the Social Security Act, but while the Social Security Act can impose additional requirements it can't negate any of those put in place by the SIS Act. So the Schedule 1B limit will still apply.
The Social Security Guide offers a useful plain-english interpretation and application of the Act, but it doesn't have the force of law. The guide covers various situations including family law cases and hardship payments. But for the type of commutation discussed here this is what it says:
This seems to be saying the whole account balance must be included in the commutation.
As always, discuss your case with Centrelink/DVA before making any changes.
Either the present value of the remaining payments or the whole account balance (up to the SIS Schedule 1B limit) might be acceptable as the commutation value of a life-expectancy pension. But circumstances may dictate a preference for one or the other or a different valuation method altogether. Be sure to consult with Centrelink/DVA if you pension is asset-test exempt.
If the commutation value is less than the account balance the residual amount will remain in an unallocated reserve.
The trustees can make allocations from that reserve to members of the fund. The taxation treatment of those allocations is set out in ITAR 1997 291-25.01. The provisions of that regulation are described here. Depending on its size it may take many years to exhaust that reserve or it may be possible to allocate all of it to fund members in one action.