Consultant flags strategies to negate complex ECPI calculations
In light of the ATO’s updated view on the calculation of exempt current pension, an industry consultant has identified some strategies for avoiding the more complicated ECPI calculations involving separate tax and accounting periods.
Speaking in a webinar, SMSF Academy director Aaron Dunn said one of the more controversial issues recently has been the ATO’s updated view on the calculation of exempt current pension income (ECPI).
The ATO has made very clear that the way in which they interpret section 295-385 of the ITAA 1997 is that for the period in which it was 100 per cent in pension phase, it is actually deemed to be a segregated fund, Mr Dunn explained.
“Therefore for that period we must apply the segregated method, which of course means that we need to disregard all income, gains and losses in respect to that particular period,” he said.
Where a contribution is made, he said, an actuarial certificate will need to be obtained and the actuary will need to look at the specific period from when the contribution was made through to 30 June to determine the tax exemption.
“This is going to create some practical challenges because we're going to have to look at those as separate accounting and tax periods in terms,” he said.
“Quite clearly the actuaries aren't endeared by this process and have been vocal in their concerns with this and the fact that it is not in accordance with their understanding with how the law would work. The ATO appears resolute on this issue, [however], and therefore what we need to contemplate is how we deal with this issue going forward.”
Mr Dunn said there are, however, some solutions for avoiding this more complicated calculation in some circumstances.
“There are a couple of things to contemplate. There are going to be circumstances where funds are not going to be allowed to segregate [anyway]. We could have individuals who have total superannuation balances above $1.6 million at 30 June. So they're ordinarily ineligible to claim exempt current pension income on that basis,” he noted.
“There will be circumstances where funds are going to have to get certificates even where they're 100 per cent. It may be worth leaving a dollar in accumulation phase or if a contribution is coming into the fund, what we may look at doing once the contribution is made is starting a pension at that amount straight away.”
Mr Dunn stressed that while the ATO has confirmed it will allow professionals to continue using the common industry practice for calculating ECPI for at least the 2016/17 annual returns practitioners will need to look at addressing this for future financial years.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.