Lifetime pensions are prescribed by the SIS Act under regulation 1.06(2). Asset-test exempt lifetime income streams are lifetime pensions that have been granted asset-test exemption under the provisions of the Social Security Act 1991, section 9A.
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 of lifetime pensions. SIS Reg 1.06(2) specifies the following:
The precise meaning of 'benefit' is unclear. It isn't defined in the SIS Act or Regulations or in the ITAA. 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(2)(b) ... the size of payments of benefit in a year is fixed, allowing for variation only ...and
SIS Reg 1.06(2)(e)(iii) ... the superannuation lump sum resulting from the commutation is transferred directly to the purchase of another benefit ...
So 'benefit' could mean:
Since the purpose of the commutation is to change the pension from one form into another, not to cash it out, the meaning of 'benefit' in this case is not consistent with either #1 or #2 above. an amount required to fund the pension stream or the whole amount that has been set aside. This line of reasoning suggests that a commutation value equal to either #3 or #4 above are consistent with the SIS Act.
But whether and to what extent the distinction between cashing-out and commutation is relevant to the SIS Act isn't clear, so other interpretations are possible.
ATO ID 2015/22 provides useful insight into the ATO's view. The decision deals with the commutation of a lifetime pension to a market-linked pension where the reserve set aside to fund the pension was not used for any other purpose. But, the legislation and points-of-view the ATO used in formulating that decision appear equally valid if the commutation had been made to a suitable annuity.
ID 2015/22 makes it clear that there are no taxation consequences for using one of:
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 formulate a separate one for commutation value according to the dictates of the SIS Act and the circumstances of the original pension.
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:
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.
In conclusion: either the present value of remaining pension payments (= 'best estimate' as determined by an actuary) or the whole account balance are acceptable as the commutation value of a lifetime pension. Circumstances may dictate a preference for one or the other or a different valuation altogether.
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.