From the 2021-22 income year SMSFs which have a period of deemed segregation will have a choice for how to claim ECPI. This ‘ECPI choice’ will allow funds to elect to treat all assets of the fund as if they were not segregated current pension assets for a year and solely use the proportionate method to claim ECPI.
This reform can reduce complexity for funds who would otherwise need to use both the segregated and proportionate method to claim ECPI, by enabling them to simply use the proportionate method for the full year… taking us back to the approach which was common industry practice pre-1 July 2017.
However, despite an intent of this reform to simplify the impact of deemed segregation on a fund’s calculation of ECPI, the ECPI Choice rules bring a new set of complexities… what choice should funds make? And what does this mean for the SMSF administration processes for claiming ECPI and obtaining an actuarial certificate?
To assist practitioners with understanding the new rules and the practical implementation of the ECPI choice for SMSF clients Accurium recently collaborated on three webinars with leading SMSF administration platforms; BGL, Class and SuperMate. Over 3,800 SMSF practitioners attended these sessions, upskilling themselves with the latest knowledge around ECPI rules and strategies, and understanding how to implement ECPI choice within their SMSF administration platform.
Each webinar included an overview of ECPI methodology and the new rules, a practical demonstration of implementing the new rules within the SMSF administration platform, and then a free-flowing question and answer time. With 75 questions asked throughout the sessions it is obvious that in light of the continuing changes to ECPI rules SMSF practitioners remain keen to educate themselves on how to incorporate these new rules into their practices and provide the best strategies and tax outcomes for their clients.
It was demonstrated that it is very likely an SMSF’s amount of ECPI claimed, and therefore overall tax outcome, will be different under the default deemed segregated approach, compared to the result if the fund elects to use the proportionate method under the new ECPI choice provisions.
How different the outcomes are will depend on the circumstances of the fund, primarily driven by the timing of when income is received in a year. During the webinars we discussed some rules of thumb which may help practitioners understand if the difference in tax outcomes is likely to be material, and if so, which method might provide the better ECPI outcome. After demonstrating examples of ECPI outcomes under each method, 55% of attendees who answered our poll indicated they expect clients will ask them for a comparison of methods only if it is unclear which may provide the better tax outcome and the tax difference is likely to be material. A further 26% identified that they expect their clients will typically keep it simple and choose to use the proportionate method, and 19% indicated their clients may ask them to run a comparison of the ECPI outcomes to determine which method to use, no matter how material the expected difference.