New rules on claiming exempt current pension income (ECPI) that come into play next year may mean significant changes to the operations of SMSF administrators.
When the Government introduced the $1.6 million transfer balance cap, it also passed a number of integrity measures aimed at making sure the cap generated the expected tax revenue. One of these was legislation to prohibit SMSFs with members with large super balances from using the segregated method when claiming ECPI.
Funds whose members are impacted by the transfer balance cap are likely to now have both tax-free retirement phase income streams and accumulation accounts. The Government was concerned that trustees might use the segregated method to cycle assets between supporting the accumulation and retirement-phase accounts to get the best tax outcomes. For example, a low yielding rental property might be segregated to the support the accumulation account to maximise expense deductions, but then transferred to support the pension account when it comes to selling it, thus ensuring the capital gains are entirely tax free.
Legislation introduced banning segregation of assets
Like a lot of the super reform measures, the ‘disregarded small fund assets’ legislation introduced to try and tackle this perceived issue is complicated to say the least. A fund will not be able to use the segregated method in a particular income year if the fund:
These rules throw up a number of oddities for SMSF professionals to deal with. One such quirk is that the rules refer to a fixed figure of $1.6 million, rather than to the transfer balance cap. The transfer balance cap is indexed with inflation so is likely to increase over time. However, the test for this particular rule will always refer to $1.6 million, meaning that more and more funds will be affected.
Further, it is possible for an SMSF to have only retirement-phase accounts, but not be eligible to use the segregated method. For example, a member may have a pension in their SMSF worth less than $1.6 million, but the value of their super accounts outside the SMSF brings their total superannuation balance above $1.6 million. This anomaly was raised in a number of submissions to government on the draft legislation, including by the Actuaries Institute. However, no changes were made when the final legislation was passed.
Changes to claiming exempt current pension income
The good news is that there is a solution to simplify the tax return process and claim ECPI for an SMSF without all this new complexity. Maintaining a very small accumulation balance at all times in the SMSF will mean that a fund will never have a period where assets are solely supporting retirement phase income streams. It will then avoid the possibility of having to use the segregated method altogether, removing the uncertainty and requirement for additional information.
A small or notional accumulation balance will not materially affect the tax exempt percentage when using the unsegregated method so the ECPI will be largely unchanged. Using the unsegregated method has other advantages too. It allows losses to be carried forward to future years and reduces the administrative complexity where a fund may otherwise move between segregated and unsegregated periods during an income year. Of course there is the additional cost of an actuary’s certificate, but these are relatively inexpensive and can be ordered directly via most SMSF accounting software platforms.
The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.