Our data indicates that around 10% of funds have one or more periods which are solely in retirement phase. Since the superannuation reforms came into effect from 1 July 2017 these funds had to consider the calculation method to apply when claiming exempt current pension income (ECPI). Many SMSFs found the need to use both ECPI methods in the same income year. Terms such as “disregarded small fund assets” and “deemed segregation” has increased the complexity and work needed for a fund, and their accountant, to manage its tax affairs.
Changes implemented for the 2022 financial year onward will allow an SMSF trustee to choose the method it will use to calculate and claim ECPI in certain circumstances, simplifying the situation. A fund which was solely in retirement phase for part of the income year but not the full year, known as a period of “deemed segregation”, will be able to choose whether they wish to calculate ECPI based on the default method, applying the segregated method to any period of deemed segregation and the proportionate method to other periods, or they can instead choose to use the proportionate method for the entire income year.
Not all SMSFs will have ECPI choice
For an SMSF trustee(s) to have a choice of how it will calculate and claim ECPI for the 2021-22 and following income years, the fund must:
• have at least one period of deemed segregation during the income year; and
• not have disregarded small fund assets. An SMSF with disregarded small fund assets will not have access to this new ECPI choice measure and must use the proportionate method to claim ECPI for the entire income year. You can use the Accurium Flowchart “Does your fund have disregarded small fund assets?” to help with determining whether an SMSF does have disregarded small fund assets for a given income year.
Making the choice
This choice of ECPI calculation method must be made by the SMSF trustee(s). Where the trustee(s) makes no choice the default ECPI calculation method must be used, which means applying the segregated method to any periods of deemed segregation and the proportionate method to other periods.
In relation to the SMSF trustee making the choice, that is, to effectively apply the proportionate method for the entire income year, the Explanatory Memorandum (EM) to the Bill that introduced this measure states that:
• Trustees will choose which method to use and calculate ECPI before submitting the fund’s SMSF annual return;
• This choice is not a formal election and does not have to be submitted to the ATO. However, it is expected that trustees will keep a record of any choice they make and the details of the calculation they use.
It appears that effectively SMSF trustees will be able to make their choice of the ECPI calculation method on a retrospective basis, that is, as part of the preparation of the annual financial statements and SMSF annual return.
Given some SMSF trustees will need to make a choice about how ECPI will be calculated and claimed in the 2021-22 and following income years, it raises some questions as to how this will be managed and decided upon.
What are the ECPI choice considerations?
Where an SMSF trustee(s) has ECPI choice, will their selection be part of the yearly fund review with their accountant? Will the trustee(s) minute a default choice which applies to the current and all future income years? Will the accountant make the choice for the SMSF trustee and select the ECPI method and later get approval from the trustee(s)?
What if the default method, applying the segregated method to periods of deemed segregation, would have given a better tax outcome for the fund and it was not considered, or even compared to making the choice to apply the proportionate method for the entire income year? Will a blanket trustee minute established before the fact be enough if the trustee(s) complains about having received an inferior tax outcome?
With the 2021-22 financial year having just ended, these questions are now relevant and need to be addressed by practitioners and firms. A procedure needs to be established because even though the intention is to offer a simplified ECPI calculation approach, as we can see, there are still several issues that require consideration.
While we cannot advise you regarding your organisation’s procedures, we have updated our online actuarial certificate application wizard to allow for this choice of ECPI calculation method when it is relevant to the Fund. This will permit you to perform your own comparative analysis of the tax outcomes where an SMSF trustee has ECPI choice.
You can also refer to the Accurium Flowchart “Does an SMSF have a choice of how to calculate and claim Exempt Current Pension Income (ECPI)” to help you determine whether an SMSF does have ECPI choice, and of course, if you do have any questions regarding these calculations, please give us a call.
For further information you can also refer to our technical paper “Exempt current pension income: getting it right”.