Super tax unlikely to affect ECPI
The proposed changes for an additional personal tax on superannuation accounts that have more than $3 million are unlikely to impact the calculation of ECPI. This is because most SMSFs where members have a retirement phase pension and a total super balance above $3 million have “disregarded small fund assets”. This means they are already required to have an actuary determine their ECPI.
A member could have a total super balance above $3 million where all assets of the fund are wholly supporting income streams. This means that the fund’s ECPI is 100% for the year and an actuarial certificate is not required.
As the proposed new tax is a personal member tax the ECPI calculation for the year won’t change under either of the scenarios above.
Disregarded small fund assets
Effective 1 July 2017, SMSFs are required to use the actuarial method to calculate ECPI if all of the following apply:
- The fund has a retirement phase pension during the year
- Any fund member has a total super balance above $1.6 million at the previous 30 June
- where the total super balance is the member’s balance in all super funds (not just the SMSF)
- The member with a total super balance above $1.6 million has a retirement phase pension at the previous 30 June
- where the retirement phase pension is in any fund not just the SMSF.
The $1.6 million threshold is defined as $1.6 million rather than being linked to the transfer balance cap. When the transfer balance cap is indexed to $1.9 million the threshold for disregarded small fund assets will remain at $1.6 million.
There have been two legislative changes that were effective from 1 July 2021 that impact ECPI (but these may be old news to your audience and with 2021/22 annual returns due by 15 May 2023 at the latest, many trustees will have already made their 2021/22 elections).
Legislation (Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Act 2021) was passed to enable SMSF trustees to choose their preferred method of calculating exempt current pension income when they have member interests in both accumulation and retirement phases for part, but not all, of the income year.
With effect from the 2021/22 financial year SMSFs that do not have disregarded small fund assets can choose which method to use to calculate ECPI. Trustees need to make an active choice to use the unsegregated (actuarial) method for the entire year. The default method when an SMSF moves from segregated to unsegregated during the year is that each period must be treated separately.
The election needs to be made each year prior to the SMSF claiming ECPI via the SMSF annual return. The choice is not a formal election and does not have to be submitted to the ATO. However, it is expected that trustees will keep a record of any choice they make and the details of the calculation they use.
Deciding and documenting
Fortunately, most of the actuarial firms that provide electronic actuarial certificates allow trustees to calculate under both methodologies. The trustee then pays for the certificate that provides the best outcome for members. Retaining copies of the results of both options and recording the trustee’s decision to act in the best financial interest of the member’s is recommended.
100% retirement phase
Legislation (Treasury Laws Amendment (2021 Measures no.6) Act 2021) was passed to remove the requirement for superannuation trustees to provide an actuarial certificate when calculating exempt current pension income using the actuarial method, where all members of the fund are fully in the retirement phase for all of the income year. This applies even if fund has disregarded small fund assets.
This was just the correction of an unintended consequence of requiring funds to pay for an actuarial certificate which was not required.
Potentially of interest for advisers when planning for 2023/24 is the timing of transactions in SMSFs.
Funds that use the segregated method can maximise ECPI by ensuring that the disposal of assets that have a capital gain is completed when the fund has maximum benefits in the retirement pension phase, rather than when the fund has large benefits in accumulation phase.
Where an SMSF uses the unsegregated method, an actuarial certificate is required to determine the amount of ECPI based on the average member interests in the retirement phase throughout the year relative to the average total member interests. This is the most common method of calculating ECPI in SMSFs.
The calculation of ECPI is determined as:
Average value of retirement phase liabilities
Average value of superannuation liabilities
Where an unsegregated fund sells an asset that results in a capital loss, that loss can be carried forward if it is not used to offset a gain in that year. Capital gains are offset against capital losses before the ECPI percentage is applied.
The timing of asset sales are not the only transactions where timing is important for funds that use the actuarial method at any time during the year. Based on the above formula, ECPI can be maximised by maximising retirement phase liabilities throughout the year, including by commencing pensions early in the year and by making pension payments and commutations late in the year.
ECPI can also be maximised by minimising non-retirement phase liabilities throughout the year, by making withdrawals from accumulation and transition to retirement pensions (that aren’t in retirement phase) early in the year and by making contributions late in the year.
Managing and planning transactions that impact the calculation of ECPI is now something that needs to be planned for in each coming year.