Hayes Knight director of SMSF services Ray Itaoui said that before the changes to exempt current pension income (ECPI) were introduced, when an SMSF received tax statements for managed investments, unlisted unit trusts or private unit trusts, the practitioner would record all the components from these statements at 30 June.
“[Due to] the change to the interpretation of ECPI, however, a more accurate representation is to actually have the components for that tax statement distributed throughout the year, relevant to each distribution that was received throughout that year,” he explained.
“However, when these managed funds provide tax statements, they don’t necessarily give a breakdown as to what the components of each distribution were throughout the year.”
Many of these managed funds only provide one figure, he said, which is an accumulation of all the components of all the distributions received throughout the year.
An SMSF, however, has to determine whether an amount relates to the 30 June distribution or whether the distribution relates to the entire year.
“It creates some complexity for the ATO and auditors in terms of working out if the distribution of those components is being applied correctly. It also creates opportunities to generate more favourable tax outcomes for clients where those components are placed in a period where it creates a better outcome,” he explained.
“If you have a fund that has a large number of unlisted unit trusts and managed investments and receives a lot of tax statements at the end the of the year, it can be quite cumbersome for accountants to try and break up those components to different distributions throughout the year, and you’ll probably see a lot of accountants continuing to put that number in at 30 June, as was always done in the past.”
The SMSF industry needs further guidance in this area to ensure there is a consistent application of these tax statements for SMSFs, he said.
“It’s something that we’re trying to work out how we approach it at the moment. I think while there isn’t any specific guidelines from the ATO, a common-sense approach works best. It’ll be interesting to see if the ATO raises any concerns around people trying to manipulate the system to create better tax outcomes,” said Mr Itaoui.
Surely the reconciliation between accounting income and taxable income would be able to work this through without too much fuss?
The Tax Statement amount would be apportioned across the quarterly cash payments, if you have a fund that has a mixture of segregated and unsegregated assets throughout the year.
Alternatively, only SMSFs with no +$1.6m TSB members can segregate so, maybe those funds spend some time working out what assets are in the segregated pool – deliberate segregation – as compared to default segregation.
Enter the tax statement at 31 December if you hold the ETF for the whole year and there aren’t too many Tbar changes?
Ha Ha Ask the ATO for guidance in this complex area!!! Now that would be asking for trouble wouldn’t it?
My experience with the ATO in recent times is they are flat out getting anything right with very high error rates processing returns and even interpreting the raft of changes they have imposed and no apologies given for their errors. So to ask the ATO to further rule on how Trust Distributions should be treated is a nightmare waiting to happen. Trust distributions have always been assessed based on which financial year the components of distributions related to so why is there any need for change.
An interesting topic and well worthy of discussion. My first question in relation to these payments from trusts is whether they are trust distributions, or really prepayments/advances of future income, which is then ascertained when the trust income is calculated and formally distributed at year end. Does one need to know details of trustee minutes to know? As said, ATO guidance is required, but even that may have issues depending on how each trust is structured and what processes are in place. More headaches for all.