SMSF service provider flags priorities for improving ECPI
An SMSF services firm says the government should look to remove the ban on segregation applying to funds with more than $1.6 million, with the current rules causing unnecessary complexity.
In the past couple of years, there have been a few key changes impacting exempt current pension income (ECPI), including the government’s integrity measures for the transfer balance cap, which meant that funds now have to determine whether they are eligible to use the segregated method based on the members’ total superannuation balance.
In addition, the ATO began to enforce its interpretation on what constitutes a segregated current pension asset from the 2017–18 financial year onwards.
Speaking to SMSF Adviser, Heffron SMSF Solutions head of customer Meg Heffron said the changes still continue to cause a lot of complexity for SMSF professionals, particularly where they create odd outcomes.
“I think law should be simple to comply with and produce logical results, and these changes fail on both counts. You can get some really bizarre results with these ECPI rules, like two funds that superficially look exactly the same getting totally different tax outcomes, which is crazy,” she explained.
Two aspects in particular with the ECPI changes are resulting in unnecessary complexity for SMSFs and should be changed under legislation, she said.
“I think the government should legislate that members don’t have to follow the ATO’s view that if you can segregate and you’re in a period of 100 per cent pension phase then you have to segregate,” she said.
Ms Heffron said the government should also remove the ban on segregation for funds with members with more than $1.6 million at the relevant time.
“I think that was just the government worrying about people rorting the system unnecessarily in my view. It introduced a massive amount of complexity for no proven benefit,” she explained.
“They’re both equally problematic and I’d get rid of them both.”
Both the SMSF Association and Chartered Accountants Australia & New Zealand have recently lobbied the government for changes relating to actuarial certificates and ECPI.
CA ANZ called for a return to the previous industry practice for ECPI that was in place before the ATO established that the commissioner’s view was that funds which have segregated assets at any point in the year must calculate their ECPI using the segregated method for that period.
The SMSF Association also called for the government to remove the requirement to obtain an actuarial certificate when the fund is 100 per cent in retirement phase.
Under the current rules, the SMSF Association submission said that, if an SMSF has at least one retirement phase income stream at any time of year, and a fund member has a total superannuation balance over $1.6 million immediately before the start of the relevant income year, then the SMSF will have disregarded small fund assets.
This means that it will need to use the proportionate method to calculate exempt current pension income for all members for the entire income year.
This rule can result in a fund which is solely in retirement phase for a financial year being required to obtain an actuarial certificate in order to claim ECPI.
“The actuarial certificate in this circumstance would state an actuarial tax-exempt percentage of 100 per cent,” the submission explained.