The Government announced in the Budget that it would reduce costs and simplify reporting for superannuation funds by streamlining some administrative requirements for the calculation of exempt current pension income (ECPI).
The term ECPI refers to income an SMSF earns from assets held to support retirement phase income streams and is, therefore, exempt from income tax. It must be claimed in an SMSF’s annual tax return.
To make a claim for ECPI, all the SMSF’s assets must be valued at current market value. This is where things get complicated.
There are two methods for calculating the amount of ECPI an SMSF can claim – the segregated method and the proportionate method – and some complicated rules for determining which method needs to be used.
The Government cut through a lot of that complexity with its Budget announcement. Super fund trustees with interests in both the accumulation and retirement phases during an income year will be allowed to choose their preferred method of calculating ECPI.
The government will also remove a requirement for super funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase for all of the income year.
The measure will start on 1 July 2020.
The segregated method. Fund assets are segregated current pension assets if the assets are specifically identified as supporting retirement phase income streams and the income from these assets has the sole purpose of funding payment of retirement phase income streams.
Usually the value of the assets supporting retirement phase income streams will equate to the value of those income streams.
This method is used when the fund is fully in pension phase.
The proportionate approach. This approach applies where the SMSF does not set aside specific assets to support retirement phase income streams, and has members in retirement phase and accumulation phase. The SMSF determines that exempt proportion of income based on the proportion of the fund’ total liabilities that are current pension liabilities.
Under the rules that are currently applied, an SMSF may need to switch its method for calculating ECPI if it becomes 100 per cent in retirement phase within an income year when it was using the proportionate method.
The SMSF Association welcomed the Budget announcement, saying the current rules create unnecessary complexity.
The current rules, set by the Australian Taxation Office, have long been criticised. In 2017, the Actuaries Institute said: “Asking SMSFs to comply with this interpretation will increase compliance costs and cause disruption for the industry with no discernible difference in tax revenue.
“The accounting processes for funds using the segregated and proportionate methods are different. By deeming certain assets to be segregated, the ATO will force many funds to use both methods during the same year.”