PowerPoint Presentation · 9/02/2018 1 That was then, this is now The changing face of claiming...

9/02/2018

1

That was then, this is nowThe changing face of claiming ECPI

Leigh Mansell

Director, SMSF Technical & Education ServicesHeffron SMSF Solutions

Agenda

• Recap : what is ECPI, and what methods are available

• That was then : 2016/17 and earlier years

• Segregated pension assets vs actuarial certificate method

• This is now : 2017/18 and future income years

• 3 changes that affect ECPI method

• SMSFs that can’t use segregated method vs those that must

• Other administration issues to consider

What is ECPI?

Exempt current pension income

• Tax exempt investment income for funds that pay pensions in accordance with SISR

• Does not apply to non arm’s length income

• Claimed by 1 of 2 methods

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Methods to calculate ECPI

Segregated current pension assets

• s 295-385 of the ITAA 1997

“Pooled” assets (ie, unsegregated assets)

• s 295-390 of the ITAA 1997

• Annual actuarial certificate required

That was then …

2016/17 and earlier income years


Assets specifically set aside

for sole purpose of

supporting pension

liabilities

All assets of the SMSF

supporting pension liabilities

o Assets “segregated” by

default

Pension liability?

• Market value of pension balance

• Account-based, TRIS, market linked (TAP), allocated

• Net present value of expected future pension payments

• Defined benefit pensions (calculated by actuary)

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Pooled assets

Assets used to support both:

• Pension liabilities• Account-based, TRIS, market linked (TAP), allocated

• Non-pension liabilities• eg, accumulation accounts, reserve accounts

(including contingency reserves for defined benefit pensions)

Assets that switched from being segregated to pooled – or vice versa -mid year

Technically ITAA 1997 requires

• Income year to be subdivided into distinct and separate accounting periods

• ECPI determined for each part, based on relevant method for that part


100% pension phase (segregated) in these parts.

Income generated in these parts is tax exempt

Assets are “pooled” in these parts. Proportion

(actuarial certificate %) of income generated in these

parts is tax exempt

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Assets that switched from being segregated to pooled – or vice versa - mid year

Widespread and longheld industry practice has been

• Obtain actuarial certificate for entire year and apply tax exempt % to all investment income for that year

• Actuarial certificate assumed all assets were used to support a combination of pension and non-pension liabilities at all times in income year (ie, assumed no assets were segregated during the year)


ATO view

• Industry practice does not comply with ITAA 1997

• But … ATO have advised they

• Won’t “devote compliance resources” if actuarial certificate obtained that covers all of 2016/17 (QC 51875)

• Don’t intend to review ECPI calculations for 2016/17 or earlier years if SMSF moves from 100% pension phase to pooled mid-year (QC 21546)


Obtain

actuarial

certificate for

entire income year?

Comply with ITAA 1997

requirements (separate

accounting periods)

Which way to go? Compare

• Simplicity (cost vs benefit)

• Tax cost for income year

• Optimal retention of capital

losses carried forward from previous years?

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This is now …

2017/18 and later income years


Assets specifically set aside for

sole purpose of supporting

retirement phase pension liabilities

All assets of the SMSF supporting

retirement phase pension liabilities

o Assets “segregated” by default

… unless the asset is a “disregarded small fund

asset”

(new concept that applies to any fund with less than

5 members)

Change 1

Change 2

Cannot use “segregated method” for ECPI


SMSF assets are “disregarded small fund assets” in a particular income year if at any time in that particular income year, a SMSF member is receiving RP pension from SMSF and

• at the previous 30 June, any member of the SMSF had “total superannuation balances” of more than $1.6m (across all of their superannuation interests combined) and, if so

• such member was also in receipt of a RP pension from any fund (not necessarily the SMSF) on that 30 June

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Segregated current pension assets?

Example : disregarded small fund assets

Joanna 30 June 2017

ABP (SMSF) $1.2m

Accum (employer fund) $1m

TSB $2.2m

In 2017/18, RP pension in place

• At 30 June 2017, Joanna had

• TSB > $1.6m

• RP pension

• Assets are disregarded small

fund assets (not “segregated”)

• Cannot use segregated

method for ECPI

• Must get actuarial

certificate



Joanna 30 June 2017

Accum (SMSF) $1.2m

Accum (employer fund) $1m

TSB $2.2m

In 2017/18, RP pension started

1 July 2017

• At 30 June 2017, Joanna had

• TSB > $1.6m

• But no RP pension

• Assets not disregarded small

fund assets (are “segregated”)

• Use segregated method for

ECPI

In 2018/19, situation would change – segregated method could not be used in SMSF



30 June 2017 30 June 2018 30 June 2019

Adam – accum $0.05m $0.00m $0.00m

Adam – RP ABP $1.60m $1.58m $1.59m

$1.65m $1.58m $1.59m

Belinda – accum $0.02m $0.00m $0.00m

Belinda – RP ABP $1.60m $1.63m $1.57m

$1.62m $1.63m $1.57m

ECPI : following year Act cert Act cert Segregated

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Change 3

If “segregated method” can be used to calculate ECPI, it must be used

• ECPI calculations may get complicated when assets switch from being segregated to pooled (and vice versa) mid-year

• For 2017/18 and future income years, cannot use actuarial certificate method for entire year in these cases


Segregated pension assets –

Must use segregated method for these parts

Pooled assets – must use actuarial certificate method

for income in these parts


Pooled assets – must use actuarial certificate method

for income in these parts

Actuary will need information about these parts to calculate a

single tax exempt % (which is applied to income in all 3 parts)

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Actuarial certificate for pooled “parts”

For each part, need to advise actuary

• Date part started and stopped

• Market value of each account balance at start / stop dates

• Details of transactions during that “part” such as date, amount, type of transaction (eg, CC, NCC, rollover received, pension payment, LS, rollover out etc)

• If the actuarial certificate % was 90% …

… and as “disregarded small fund assets” depends on entitlements in other funds …

• Remember, the segregated method cannot be used in cases where a SMSF’s assets are disregarded small fund assets …

• The Actuary will need confirmation / advice from the accountant / administrator about whether the segregated method can or can’t be used

Overall ECPI for the year would be calculated as …

Completely tax exempt (segregated)

90% tax exempt (actuarial certificate)

Single % applied to income in all 3 periods

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Could you prevent assets switching from being segregated to pooled mid-year?

Completely tax exempt (segregated) Pooled

Contribution

Only partial tax

exemption on

investment

income

What if large amount of investment

income received at end of year

• eg, trust distributions

Keep the contribution separate from the segregated pension assets

Cash contribution• Separate bank account

• Hold in separate “sub-account” of bank account

• TD 2014/7 confirms a single bank account could be sub-divided into various “sub-accounts”

• Documentation and processing are key

In specie contribution• Documentation

Setting aside specific assets to support particular account balances

If a SMSF can’t use the segregated method for ECPI, can assets still be set aside to support

• Account balances of particular members?

• Particular types of account balances (or groups of account balances)?

• eg, pension accounts

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Member investment choice

SIS concept : this has not changed

• Can continue in 2017/18 and future income years

• All earnings / expenses relating to specific asset allocated to account balances supported by that asset

• SIS : must allocate earnings “fairly and reasonably”

Tax act changes : solely relate to how investment income is taxed

• But SIS requires costs (including tax) to be allocated on a fair and reasonable basis

Member investment choice implementedHow do you allocate tax on a fair and reasonable basis?

30 June 2017

Jay Jay – RP ABP $1.60m

Accumulation accounts

• Jay Jay $0.60m

• Dee $0.23m

In 2017/18, specific

assets set aside to

solely support this

Member investment choice implemented

ECPI method in 2017/18?

• Cannot use segregated method as Jay Jay had TSB > $1.6m on 30 June 2017, and he also had a retirement phase pension at that time

• Must use actuarial certificate method for ECPI

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Member investment choice implementedInvestment income in 2017/18

Total

SMSF

Jay Jay’s

ABP assets

“Other”

assets

Income $116k $80k $36k

Franking credits $34k $30k $4k

$150k $110k $40k

Assume tax exempt % for 2017/18 is 66%

• Tax refund is $26k

• 15% x $150k x (1 – 66%) - $34k

Member investment choice implementedAllocating tax on a fair & reasonable basis?

Option 1 – allocate based on

proportionate share of SMSF

Jay Jay – RP ABP $17k (66%)

Jay Jay – accum $7k (25%)

Dee - accum $2k (9%)

Option 2 – allocate based on actual

income from specific assets

$24k (15% x $110k x 34% - $30k)

$1.4k

$0.6k

Not reasonable in this case -

does not reflect actual income

generated by specific assets

Not reasonable in this case -

pension member subsidising

accumulation members

Member investment choice implementedAllocating tax on a fair & reasonable basis?

If separate super funds had been used …• “RP pension” fund : tax refund of $30k

• Accumulation fund : tax payable of $2k (ie,15% x $40k - $4k)

• In our view, not fair and reasonable to allocate

• $30k tax refund to ABP and “balance” of $4k tax payable to accum accounts

• $2k tax payable to accum accounts and “balance” of $28k tax refund to ABP

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Member investment choice implementedAllocating tax on a fair & reasonable basis?• Ultimately, trustee will determine what is fair and reasonable

• Apportion actual tax based upon theoretical tax in separate funds?

• Each part of SMSF would receive proportionate share without unduly advantaging or disadvantaging other part

• Ideally

• Determined at the outset and agreed upon!

• Applied consistently

Bringing it all together …

which ECPI method must be used for 2017/18 and future income years?

Bringing the 3 ECPI changes together

Did a SMSF (or SAF) member receive a retirement phase pension

at any time in the particular FY ?

On the previous 30 June, did any

SMSF member have TSB > $1.6m

(across all funds, combined)?

Yes

On the previous 30 June, did

that member have a retirement

phase pension (in any fund)?

Segregated method cannot be

used. Must use actuarial

certificate method

Segregated method can & must be

used for any segregated current

pension assets

No

Yes

No Yes

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This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation.

Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

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