Anthony Cullen, head of education for Accurium, said in a recent webinar that nothing in the law says a member of an SMSF has to claim ECPI, and there might be circumstances where they may not want to.
“However, if they are going to claim ECPI under the proportionate method, they do need to have that actuarial certificate which will apply to that part of the year that there are no segregated assets,” he said.
“ECPI is you take your accessible investment income and you modify that by the exempt portion per the actuary’s certificate, and you pay tax on the remaining amount. How you deal with the expenses will depend on the circumstances, how they’re linked to that investment income.”
When looking to use the segregated method to calculate ECPI, Cullen said, the first step is to identify particular assets that support the retirement-based pension accounts, and the income generated from those particular assets will be exempt from paying tax.
Although a member is not required to get an actuarial certificate if using the segregated method, there are other things they must consider, he said.
“One of those is that you don’t identify enough assets to support the pension interest. For example, if I’ve got a $1 million pension interest, I don’t necessarily need to find $1 million worth of investment and segregate $1 million worth [of assets].”
“I can segregate a partial amount. I might add $500,000 property that I want specifically set aside for that retirement age pension account, and the remaining $500,000 is just from the general pool. In that case, we’d be using a combination of the segregated and the proportionate method to calculate the ECPI.”
However, he said it is not possible to segregate only a certain level of assets compared to the value of interest.
“Since the introduction of transfer balance accounts, we’ve also had this concept of deemed segregated periods as well.”
“Although the ATO view has always been that if you have a period within the year that you are in 100 per cent supporting pension account, you are deemed to be segregated for that period, it wasn’t generally how the industry ran at the time.”
Cullen added that the segregated method cannot be used if the fund has disregarded small fund assets.
“The main thing to consider as well, particularly with capital gains, is that they are exempt from paying tax on an ECPI,” he said.
“Where you’ve got a segregated period, a segregated asset with a deemed segregated period, any capital transactions are disregarded. So, whether it’s a capital gain or a capital loss, they’re completely disregarded when you’re talking segregation.”
