A partial commutation occurs when a member converts part of an existing pension (income stream) into a lump sum withdrawal. This reduces the pension account balance and the member’s Transfer Balance Account (TBA).
ATO rules clearly outline the circumstances in which partial commutations are allowed, how they must be handled, and what they do not count toward.
1. A Partial Commutation Is Allowed Anytime a Member Requests It (If They Have Met a Condition of Release)
A partial commutation is valid whenever a member with an existing SMSF pension in retirement phase requests in writing that part of their future pension entitlements be converted to a lump sum.
[ato.gov.au],
It can be used when:
- A member needs cash for a large purchase or unexpected expense
- A member wants to reduce their transfer balance
- A member wants to restructure pensions or consolidate accounts
2. Partial Commutations Do Not Count Towards Minimum Annual Pension Payments
Since 1 January 2017, partial commutation lump‑sum withdrawals cannot be counted toward satisfying annual minimum pension drawdowns. [ato.gov.au], [ato.gov.au],
This means:
- Members must still withdraw the full minimum pension amount separately as pension payments.
- A partial commutation is always treated as a lump‑sum benefit (not a pension payment). [ato.gov.au]
3. Partial Commutations Can Be Used to Reduce a Member’s Transfer Balance
The ATO confirms that only a commutation (full or partial) reduces a member’s TBA — large pension payments do not. [ato.gov.au]
This is often used when:
- A member receives a reversionary pension and risks exceeding their Transfer Balance Cap
- A member wants to free up more TBC space for a new pension
Partial commutations must be reported to the ATO through a Transfer Balance Account Report (TBAR). [ato.gov.au]
4. Minimum Pension Rules Must Still Be Met When Using Partial Commutations
For a partial commutation, the SMSF must ensure either:
- The minimum pension has already been paid before the commutation, or
- Sufficient assets remain to pay the minimum before 30 June.
[ato.gov.au]
Partial commutations do not trigger the requirement to pay a minimum amount before the commutation — except in the special cases that apply to full commutations. [ato.gov.au]
5. Partial Commutations May Be Paid in Cash or In‑Specie
A partial commutation can be satisfied by transferring an asset to the member (in‑specie), provided the trust deed allows it.
CGT and stamp duty implications must be considered.
6. Can a Partial Commutation Be Re-Contributed?
Yes — subject to normal contribution rules.
- If under age 75 and contribution caps allow, the lump sum can be recontributed (typically as a non‑concessional contribution) into the accumulation account, not back into the pension.
- To maintain tax‑free earnings, the member must start a new pension with that contribution if desired.
[community.ato.gov.au]
Summary Table — When Partial Commutations Can Be Used
| Scenario | Allowed? | Key ATO Condition |
|---|---|---|
| Withdraw part of a pension as a lump sum | ✔ Yes | Must be requested in writing; TBAR required [ato.gov.au] |
| Reduce Transfer Balance Account | ✔ Yes | Only commutations reduce TBA [ato.gov.au] |
| Count toward minimum pension payment | ✘ No | Not permitted since 1 Jan 2017 |
| Pay by transferring an asset (in‑specie) | ✔ Yes | Must be allowed in deed; CGT/stamp duty apply |
| Re-contribute the lump sum | ✔ Yes (conditions apply) | Treated as a new contribution; caps apply [community.ato.gov.au] |
In Plain Terms
A partial commutation can be used at any time to convert part of a pension to a lump sum, provided minimum pension requirements can still be met, and the member has satisfied a condition of release. It is commonly used for tax planning, cash needs, or to manage transfer balance cap issues.
Disclaimer
The information provided above is general in nature and does not take into account your personal financial circumstances, needs, or objectives. It is not intended to be, nor should it be relied upon as, professional advice.
You must seek advice from a licensed professional adviser before acting on any of the information discussed.
Nothing in this post should be relied upon for the purposes of making financial, taxation, superannuation, or investment decisions.