Schedule 5 to the bill introduces the measure that was first announced as part of the federal budget in 2019 to allow SMSF trustees to choose how to calculate exempt current pension income (ECPI) where the fund has both retirement phase and non-retirement phase interests and a period of “deemed segregation”. 

In a recent update, Accurium said that the draft legislation in this schedule is quite different from the exposure draft legislation that was released by Treasury on 21 May 2021, which raised a number of concerns. It appears that the main concerns from the previous exposure draft legislation have been addressed. 

There are two methods for calculating ECPI, the segregated method and the proportionate method. Since the 2017-18 income year, a fund may have to use a combination of the segregated and proportionate methods to claim ECPI in the same income year. Generally, this occurs when there is a period of deemed segregation during the income year, as well as a period where there is both retirement and non-retirement phase balances. 

An SMSF that does not have “disregarded small fund assets” (DSFA) must use the segregated method to claim ECPI for a period of “deemed segregation”, while ECPI is claimed using the proportionate method for the pool of assets that supports both retirement phase and non-retirement phase interests. 

Provided the SMSF has only account-based pensions, it will only require an actuarial certificate to claim ECPI using the proportionate method for the unsegregated pool of assets. 

“The bill amends section 295-385 ITAA 1997 so that superannuation trustees can choose to treat all of the fund’s assets as not being segregated current pension assets for an income year if all of the fund’s assets are held solely to discharge liabilities in relation to retirement phase interests for part of that income year,” Accurium said.

“That is, where the fund has a period of ‘deemed segregation’ and does not have DSFA, the trustee can choose to treat all of the fund’s assets, held during this period, as not being segregated current pension assets. 

“This is a positive change from the original exposure draft legislation where it appeared that trustees had to make a choice in relation to each and every asset held during a period of ‘deemed segregation’ as to whether they were to be or not to be treated as a segregated current pension asset. 

Under the bill, Accurium noted all assets held during a period of ‘deemed segregation’ will be segregated current pension assets, unless the trustee chooses for all of them not to be, that is, there is only a requirement to make a choice where the trustee does not want assets held during a period of ‘deemed segregation’ to be segregated current pension assets.

Further, making the choice apply to all assets held during the ‘deemed segregation period’, rather than each individual asset, is also a positive outcome. 

“This ECPI calculation choice measure has two exceptions. Where all of the fund’s superannuation interests are in the retirement phase for all of the income year, the fund is unable to make the choice not to treat fund assets as segregated current pension assets,” Accurium explained.

“That is, the fund will use the segregated method to claim ECPI. There should be no issue with this exception as it results in the same outcome – 100 per cent of the eligible income claimed as ECPI.

“Furthermore, if the fund has DSFA, it is precluded from using the segregated method, and therefore there is no choice to make. The fund must use the proportionate method for the entire income year to calculate and claim ECPI.

“Just note the change from 1 July 2021 to remove the requirement for SMSFs and small APRA funds to obtain an actuarial certificate when calculating ECPI, where all members of the fund are fully in retirement phase for all of the income year. These funds are permitted to use the segregated method to calculate ECPI, despite having DSFA.”

By choosing to treat an SMSF’s assets as not being segregated current pension assets, during a period of “deemed segregation”, a trustee can use the proportionate method when calculating all of the fund’s ECPI for the entire income year. Accurium said it is expected that allowing this choice will minimise the complexity for trustees and reduce the associated reporting costs for funds. In effect, this allows trustees to apply the pre-2017-18 industry approach to calculating and claiming ECPI.

In relation to the SMSF trustee making the choice, the Explanatory Memorandum (EM) to the bill states that trustees will choose which method to use and calculate ECPI before submitting the fund’s SMSF annual return, according to Accurium.

“This 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,” Accurium explained.

“It appears that effectively, SMSF trustees will be able to make their choice of the ECPI calculation method on a retrospective basis, that is, as part of the preparation of the annual financial statements and SMSF annual return.

“If the trustee for an eligible fund does not make a choice then, consistent with the ATO’s current view on the application of the existing law, the fund’s ECPI will be calculated using the segregated method for any period (less than the whole income year) of ‘deemed segregation’, provided it does not have DSFA. 

“In practice, an SMSF will only be able to exercise this choice if all of the interests in the SMSF are in retirement phase for some, but not all of the income year along with all of the income derived from the SMSF’s assets is supporting retirement phase income stream benefits payable from an allocated pension, market-linked pension or an account-based pension, and the SMSF does not have ‘disregarded small fund assets.”