Treasury Laws Amendment (2021 Measures No.6) Bill 2021 was introduced into the lower house on 11 August 2021. Schedule 3 to the Bill amends the 1997 Tax Act to remove the requirement for SMSFs and Small APRA Funds to obtain an actuarial certificate when calculating exempt current pension income (ECPI), where all members of the fund are fully in retirement phase for all of the income year. This is achieved by permitting such funds to use the segregated method to calculate ECPI, despite the SMSF having ‘disregarded small fund assets’ (DSFA).
The super reforms applying from 1 July 2017 introduced DSFA to ensure members impacted by the transfer balance cap could not use partial segregation to realise capital gains 100% tax free. However, SMSFs that consists wholly of retirement phase pensions, other than defined benefit pensions, can have DSFA if member balances grow above $1.6m, and due to having DSFA they currently cannot use the segregated method to claim ECPI. Consequently, they must use the proportionate method to claim ECPI which requires an actuarial certificate even though the actuarial exempt income proportion is 100%.
Under this measure, these affected SMSFs will be permitted to use the segregated method to claim ECPI and consequently will not be required to obtain an actuarial certificate. This is achieved by excluding a fund from the DSFA rules where its assets would otherwise have been segregated current pension assets at all times during the income year. This measure saves the affected SMSF the cost of an actuarial certificate.
This measure is to apply to the 2021-22 and later income years.
But what about the ECPI choice measure?
Missing from the Bill is the second and some may say main proposed measure affecting ECPI – allowing superannuation trustees to choose their preferred method of calculating ECPI when they have member interests in both accumulation and retirement phases at one time, but only retirement phase interests at another time, during an income year.
An initial review of this measure could lead the reader to the conclusion that it simply provided superannuation fund trustees with greater choice of how they calculate ECPI, with a reduction in complexity and associated costs. However, upon closer inspection of the draft legislation that was released by Treasury on 21 May 2021, there is potential for the new legislation to make the calculation of ECPI significantly more complex than it already is. Despite the potential for increased complexity, it may provide trustees with opportunities for increasing their ECPI claims and hence reducing their tax burden.
For an analysis of the draft legislation, refer to our blog article ‘ECPI draft legislation – a closer look’.
A number of submissions were made in relation to both ECPI measures. Whilst there was generally support for the intentions of the measure to simplify and streamline administration, concerns were raised in relation to the ECPI choice measure. For example:
Actuaries Institute submission (18 June 2021):
‘….upon closer look there is potential for the new legislation to make the calculation of ECPI more complex than it already is. It may, however, provide trustees with opportunities for increasing their ECPI claims and hence reducing their tax burden’.
To read the full submission click here.
Chartered Accountants ANZ and CPA Australia joint submission (18 June 2021):
‘As trustees will be permitted to move into and out of both methods at multiple times throughout a year it will be necessary for trustees and their tax advisers to carefully model each available option to ensure they are maximising their beneficiaries’ best interests (potentially soon to involve beneficiaries best financial interests) and are not breaching a trustee covenant.
As a result, we believe this potential change may lead to greater complexity for some funds and hence greater costs for them.”
To read the full submission click here.
Self Managed Super Fund Association (18 June 2021):
‘Allowing trustees now to choose their preferred calculation method will require further changes to software and accounting and administration processes. It will create further complexity and cost as software systems and administration processes will need to be able to support both calculation methods, including tax optimisation tools to enable trustees and practitioners to identity the most tax efficient calculation method given the specific circumstances of the fund’.
To read the full submission click here.
Given the theme of these submissions from the major SMSF industry service provider representatives and that the Bill introduced to Parliament on 11 August 2021 did not include the ECPI choice measure, the question of whether Government is considering further changes has to be asked, or even the entire measure dropped? Or is it simply a case of one measure at a time?
Time will only tell.
