Last year, the ATO formally stated that SMSFs that are 100 per cent in pension, for any period of time, will be required to use the segregated method to claim ECPI.
Prior to this, it was the industry’s understanding that if an SMSF has not clearly set aside assets to be segregated current pension assets or the fund’s assets were not solely supporting pension phase for the entire year of income, the fund could use the unsegregated method to claim ECPI, according to Act2Solutions technical manager Rebecca Oakes.
“In these circumstances, the tax exempt percentage obtained via an actuarial certificate would apply to earnings received throughout the entire income year, regardless of whether there were periods of full pension phase. This is no longer the case,” she explained.
However, for the 2017-18 financial year onwards, SMSFs that are eligible to use the segregated method in a given year, if at any stage during that year there are periods where the assets are solely supporting retirement income streams, then those periods are deemed to be segregated.
For income received outside of the deemed segregated periods, the unsegregated method will be used to calculate ECPI, assuming the fund hasn’t specifically segregated any current pension assets, said Ms Oakes.
While the ATO provided a transition period for this with the ATO allowing professionals to continue using the common industry method for 2016-17 annual returns, the ATO’s new interpretation on what constitutes a segregated current pension asset is mandatory for 2017-18 SMSF annual returns.
BDO national leader of superannuation Shirley Schaefer said while the ATO has technically always held a particular view on how ECPI should be calculated, they’re now looking to enforce this.
This new interpretation for calculating ECPI has required substantial changes to software systems and for actuarial certificate providers, but also means that administrators will need to value the fund’s assets every time the fund goes into full pension phase and every time the fund goes out of full pension phase, in order to identify the income received in each of those periods.
“For smaller accounting firms that aren’t using specialist SMSF software and have to do these calculations manually, you might find there are mistakes made around that,” warned Ms Schaefer.
While Ms Schaefer said she expects most accountants will work closely with actuaries on this, it is important that accountants provide accurate information to the actuary.
“The focus of the Tax Office will be on people getting that right,” she said.
“That’s one of the two main areas of focus in relation to preparing 2017-18 annual returns.”
This caution comes as the ATO published data showing ECPI miscalculations and misunderstandings are a key contributor to non-compliance on tax obligations for SMSFs.
What about expenses? Case 100% accum until 1Oct then 100% pension. No actuarial cert required but how are expenses handled?
Hi Garvin, the general rule is: expenses paid pre 1 Oct would be deductible, expenses paid post 1 oct would not be deductible. There are of course exceptions but most expenses will be covered by that rule.
The ATO will do jack as they lack resources and know how, this is a trivial point wasting air time, this probably affects .001% of the SMSF’s in the country and any impact would be immaterial that the ATO would not pick up nor should we be wasting time on it. Actuarials are in fact a scam, red tape that should be abolished for at least those on BGL, Class and SuperMate.