By Mark Ellem
In the September 2017 SMSF News Alert (issue 14), the ATO has confirmed its view regarding the approach to claiming ECPI in an SMSF that consisted wholly of pensions for only part of a financial year.
In short, I agree with the ATO’s approach, that is, the fund uses the segregated method to claim ECPI during that part of the financial year the fund consisted wholly of pensions and the unsegregated method to claim ECPI for the balance of the financial year.
However, the News Alert notes that they have made an administrative concession with respect to their compliance approach for the 2016/17 year and prior. In relevant instances, SMSF trustees will not face compliance action for prior years’ ECPI calculations where those calculations were based upon an industry practice that is not consistent with the ATO’s view of the law.
We see this approach by the ATO as a good, practical outcome. On one hand it confirms our interpretation of how ECPI should be claimed by a fund that has both segregated and unsegregated pension assets in the one financial year. On the other, by allowing application of “industry practice” for the 2016/17 financial year, using the unsegregated method for the entire year, even though for part of the year the fund was wholly in pension, it will provide some breathing space for actuaries, accountants and software providers to review what changes may need to be implemented to apply the ATO’s view in the 2017/18 and following years.
However, we would caution those preparing 2016/17 financial statements and returns to simply default to the “industry practice” of applying the unsegregated method for the entire 2016/17 year. You could end up with the SMSF paying more tax than if the law was applied in accordance with the ATO’s view, which we agree with. For example, if the SMSF sold an asset during the period the fund was wholly in pension, any capital gain should be 100% exempt. However, if you apply an ECPI% to the entire 2016/17 year, you are now turning a 100% exempt gain into partially assessable. This is particularly relevant for segregated funds which became unsegregated on or before 30 June 2017 to comply with the $1.6 million Transfer Balance Cap. The application of the unsegregated method may be good administratively for the accountant, but the SMSF client is not going to be that happy if they discover the fund has paid more tax than they should. Such funds should be reviewed on a case by case basis and discussions had with the trustee(s) to determine the approach for claiming ECPI in 2016/17. This is not really a new issue but it’s come to the surface again now as a result of many segregated funds having to switch to the unsegregated approach in order to comply with the Transfer Balance Cap.
I do not agree with the premise that the adoption of the ATO’s approach will create complexity for “tens of thousands of SMSFs”. Those using specialised SMSF admin & compliance platforms, like our SuperMate, will find that like now, calculating ECPI and obtaining the relevant actuarial certificate, where necessary, will be an automated process. Further, most pensions are commenced on 1 July of each financial year, so it will only be an issue where a fund changes from segregated to unsegregated or vice versa during the year. You also have to take into account that there will be a number of SMSFs that will not be allowed to use the segregated method to claim ECPI, so for them, this is a non-issue.