“A fund which was solely in retirement phase for part of the income year but not the full year, known as a period of deemed segregation, will be able to choose whether they wish to calculate ECPI based on the default method, applying the segregated method to any period of deemed segregation and the proportionate method to other periods, or they can instead choose to use the proportionate method for the entire income year,” Mr Ellem explained.

Not all SMSF trustees will have the choice of how it will calculate and claim ECPI for the 2021–22 and following income years, he noted.

In order to have the choice, Mr Ellem explained that the fund must:

• Have at least one period of deemed segregation during the income year; and
• Not have disregarded small fund assets. 

An SMSF with disregarded small fund assets will not have access to this new ECPI choice measure and must use the proportionate method to claim ECPI for the entire income year, he explained.

In terms of making the choice, Mr Ellem said the Explanatory Memorandum to the bill states that trustees will choose which method to use and calculate ECPI before submitting the fund’s SMSF annual return.

It also states that 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, said Mr Ellem.

“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,” he said.

“Given some SMSF trustees will need to make a choice about how ECPI will be calculated and claimed in the 2021–22 and following income years, it raises some questions as to how this will be managed and decided upon.”

For example, SMSF professionals will need to think about whether the client’s selection will be part of the yearly review with the accountant, said Mr Ellem.

They’ll also need to consider whether the trustee(s) will minute a default choice which applies to the current and all future income years or whether the accountant will make the choice for the SMSF trustee and select the ECPI method and later get approval from the trustee.

“What if the default method, applying the segregated method to periods of deemed segregation, would have given a better tax outcome for the fund and it was not considered, or even compared to making the choice to apply the proportionate method for the entire income year? Will a blanket trustee minute established before the fact be enough if the trustee(s) complains about having received an inferior tax outcome?” he questioned.

With the 2021–22 financial year now finished, Mr Ellem said these questions are now relevant and need to be addressed by practitioners and firms.

“A procedure needs to be established because even though the intention is to offer a simplified ECPI calculation approach, as we can see, there are still several issues that require consideration,” he said.

Accurium has recently updated its online certificate application wizard to allow for the choice of ECPI calculation method where it's relevant for the fund.

“This will permit you to perform your own comparative analysis of the tax outcomes where an SMSF trustee has ECPI choice,” said Mr Ellem.