Government releases draft legislation for ECPI changes

The draft legislation provides choice for superannuation fund trustees to use their preferred method of calculating ECPI where the fund is fully in the retirement phase for part of the income year but not for the entire income year.

The bill amends the definition of segregated current pension assets in section 295-385 of ITAA 1997 by expanding the circumstances when a superannuation trustee can choose to not treat an asset of a fund as a segregated current pension asset. 

“Specifically, the amendments provide that superannuation trustees can choose whether to treat an asset held by the fund as a segregated current pension asset, where all of the fund’s assets are held solely to discharge liabilities in relation to retirement phase interests for part of the income year, but not for the whole income year,” the government said in its draft legislative papers.

“By choosing whether or not an asset is a segregated current pension asset, a trustee can decide whether the proportionate method or segregated method is applied to income derived from that asset when calculating funds exempt current pension income. It is expected that this will minimise the complexity for trustees and reduce the associated reporting costs for funds.”

In practice, the government noted a trustee will only be able to exercise this choice if all of the interests in the fund are in retirement phase and all of the income derived from the fund’s assets is supporting retirement phase income stream benefits payable from an allocated pension, market-linked pension or an account-based pension.

“Trustees cannot choose to treat an asset as a segregated current pension asset if amounts of income derived from the asset are supporting the payment of other superannuation benefits or are being held in unallocated reserves,” the government said.

The draft legislation will also remove a redundant requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI, where the fund is fully in the retirement phase for all of the income year. This is achieved by permitting such funds to use the segregated method to calculate exempt current pension income.

The draft legislation papers noted that a fund is not covered by the disregarded small fund assets rule for an income year if, at all times during the income year, all of the assets of the superannuation fund would, apart from subsection 295-385(7) ITAA 1997, be segregated current pension assets. Subsection 295-385(7) in the ITAA also provides that disregarded small fund assets are not segregated current pension assets.

“This means that funds who would only be prevented from using the segregated method for calculating exempt current pension income by the disregarded small fund assets rule, can now use the segregated method,” the government said.

“Superannuation income stream benefits prescribed by regulation 295-385.01 of the ITAR 2021 are ‘not required to obtain an actuarial certificate when using the segregated method to calculate exempt current pension income’.

“An actuarial certificate is still required for funds where it is possible that, at any time during the income year, assets and earnings are greater than the estimated liabilities, even if all members are fully in retirement phase.

“In such circumstances, because the assets and earnings are greater than the amount required to discharge the estimated pension liabilities, the income stream is generating taxable income and therefore the excess amount is liable for income tax. As the exempt proportion is no longer 100 per cent, not all the fund’s assets will be segregated current pension assets and an actuarial certificate would provide necessary rather than redundant information.”

The new draft legislation comes as a recent survey had revealed a majority of SMSF practitioners are against the proposed ECPI changes slated to come at the start of the next financial year.

The exposure draft legislation and supporting materials are available on the Treasury website, with stakeholders encouraged to provide their feedback. Consultation will close on 18 June 2021.