Calculating exempt current pension income (ECPI) for SMSFs has always been a challenge for administrators. The ATO has confirmed that it will no longer accept methods for calculating ECPI prior to 1 July 2017, particularly when it comes to a SMSF that has switched from unsegregated to segregated during the course of the financial year.
Some of the significant changes to ECPI from 1 July 2017 is:
- Income derived from Restricted Transition to Retirement Income Streams (TRIS) are no longer tax exempt
- A SMSF can no longer apply the segregated method for ECPI purposes, if any member in the SMSF has a:
- total superannuation balance (TSB) of more than $1.6 million; and
- retirement phase pension
Keep in mind when reviewing these requirements, that it applies to any fund the member is in. Similar to non-concessional contribution eligibility and the TSB of $1.6M, the assessment on whether a fund can segregate or not is also conducted at the end of each financial year moving forward.
- No longer permitting trustees to apply ECPI for the entire year, using the actuarial certificate method, when SMSFs have alternated between being having a mix of pension and accumulation to either 100% in accumulation or 100% pension phase
From 1 July 2017, you need to assess which of your clients are now prohibited from using the segregated method. You will need to ensure that you have the full snapshot of your clients TSB and income streams being paid (not just limited to the SMSF).
For the SMSFs that are switching between having a mix of pension and accumulation to either 100% in accumulation or 100% pension phase, you will have to apply the:
- full tax exemption for the periods of 100% segregation to pension;
- As assessable income for the period of 100% accumulation
- actuarial certificate method to the periods of un-segregation, Note, if more than one period of the fund being unsegregated during the financial year, you are still only required to obtain one actuarial certificate.
This will encourage a further shift over to super software providers for those tax agents still using non-super software when preparing SMSFs financials and tax returns.
Also, now with the inability to apply the actuarial certificate method for the entire year for certain funds, this could result in either certain capital gain events being fully assessable or exempt. Timing is an issue, but Part IVA needs to be kept in mind. Some of these funds are opting to always have a small accumulation account balance in place to ensure the actuarial certificate ECPI can be applied for the full year but advice should be sought by the client to see if this is beneficial.
Please ensure you identify which of your clients are affected and seek advice on how to best navigate ECPI.
If this article has raised questions for you, please contact us today to discuss how we can help.