‘Industry practice’ could create tax bill for SMSFs
SMSF professionals could find themselves having an uncomfortable conversation with their clients if they fall back on the administratively easier standard industry practice to claim exempt current pension income (ECPI).
Recently, there has been debate about claiming ECPI in 2016/17 for a fund that was 100 per cent pension - a default segregated fund - and then swapped to the unsegregated method as part of the compliance with the transfer balance cap and applying CGT relief.
As Heffron’s head of customer, Meg Heffron, recently explained - common practice for funds that have both pension and accumulation interests during the year, and where there is only a brief period where they are solely in pension phase, is to use the unsegregated method for all income earned in the year.
“We would normally just get an actuarial certificate for the whole year and apply it to all of the year’s income,” she said.
The ATO has now confirmed it will allow professionals to continue using this method for at least the 2016/17 annual returns, Ms Heffron said.
Speaking to SMSF Adviser, executive manager for SMSF technical services at SuperConcepts, Mark Ellem, is cautioning SMSF professionals to closely examine the approach they take in light of the contention.
“If you apply ‘industry practice’ and claim ECPI under the unsegregated method for the entire 2016/17 year, it could result in the fund paying more tax, plus confusion on the application of CGT relief. If an SMSF that is wholly in pension, swaps to the unsegregated method on the 30 June, or any other date from 9 November 2016, the notional capital gain - from applying CGT relief to an eligible asset - is not assessable, as it is a deemed sale of a segregated current pension asset,” Mr Ellem said.
“However, if you now apply an ECPI percentage to the entire year’s income, you are likely to end up with a portion of the notional capital gain being included in the calculation of assessable income, even though it should be disregarded. You may argue that for CGT relief purposes, it was a gain from a segregated current pension asset and therefore fully exempt, but now you’re arguing that for all other fund income, the unsegregated method applies, regardless of whether it was derived from segregated current pension assets,” he said.
“This is also the situation for any real capital gains derived during the period the fund was wholly in pension. What if the fund disposed of assets prior to the partial commutation of the pension? Any gain should be 100 per tax exempt, but if you apply the unsegregated method to the entire financial year, you’re turning a 100 per cent exempt gain into a partially assessable gain.”
Overall, SMSF professionals cautioned that while using standard practice might be administratively easier, it may result in SMSF clients paying more tax - “and that’s a client conversation you probably don’t want to have.”
