Changes to how exempt current pension income (ECPI) is determined announced in the 2019-20 Federal Budget are due to come into force from 1 July 2021. While draft legislation is yet to be released, the proposals suggest SMSF trustees will be given a choice over whether to use the proportionate method or segregated method when claiming ECPI for funds that are solely in retirement phase for a period in an income year.

In a survey of Accurium’s clients, fewer than one in five (18%) respondents said they wanted to see these changes come into force. The changes are intended to make the system simpler. However, as we and other commentators have noted, they may end up having the opposite effect, creating more complexity for trustees and their advisers.

There was only slightly more support from respondents (21%) for the status quo. This accords with our experience where we find many practitioners struggle with the complexities of the current rules. Understanding whether a fund has disregarded small fund assets (DSFA) or not and how this impacts the ECPI calculation is an ongoing bugbear. Funds that don’t have DSFA can find themselves having to use both the proportionate and segregated methods in the same year due to assets being deemed to be segregated.

Accurium requires practitioners applying for an actuary’s certificate to declare if a fund has DSFA. However, our analysis shows that over a third of SMSFs declaring that they have DSFA have no members with an opening balance of over $1.6m. The definition of DSFA looks at members’ total superannuation balances, including balances held outside their SMSF, so it is possible for an SMSF to have DSFA and yet all its members have balances in the fund below the $1.6m threshold. However, it is certainly surprising that this figure is so high and raises the question of whether some SMSFs are mis-reporting their DFSA status. Many are unfamiliar with the relatively new concept of ‘deemed’ segregation and find using the proportionate method for all income a simpler approach.

The fact that four in five practitioners surveyed want to see the rules changed certainly suggests the current system could be improved. Check out the survey results to see what changes to the ECPI regime practitioners most want to see – the results are certainly interesting!

The full results can be found in SMSF Retirement Insights report, Volume 9.