It’s been long awaited, but Treasury has finally released for consultation an exposure draft that proposes to effect two changes in respect to the exempt current pension income (ECPI) rules for the 2021-22 financial year:
- Removing the current unnecessary requirement to obtain an actuarial certificate to determine ECPI where 100% of the fund’s assets are supporting the payment of pensions, but the operation of s.295-387 of the ITAA 1997 applies (i.e. disregarded small fund assets); and
- Providing the trustee with a ‘choice’ in calculating ECPI where the fund has both segregated and unsegregated periods during an income year.
Initially announced in the 2018-19 Federal Budget, the start date of these measures were extended to 1 July 2021. In this blog post, I discuss the first measure of removing the unnecessary requirement for an actuarial certificate in certain circumstances due to the disregarded small fund assets rules:
Fixing a nonsense ECPI outcome
When the Federal Government introduced the super reform measures from 1 July 2017, I highlighted this nonsense situation whereby an SMSF would be caught in an unnecessary position of needing to obtain an actuarial certificate where a 100% tax exemption would apply – https://www.smsfadviser.com/news/15312-nonsense-outcome-surfaces-in-new-regulations.
To understand this further, let’s explore the following example:
Example – Application of disregarded small fund assets
John is the sole member of his SMSF and is drawing an Account Based Pension. At 30 June 2019, his total super balance (TSB) was $1.47m. With 100% of the fund’s assets in the retirement phase for the 2019-20 financial year, his fund is segregated for tax exemption purposes (applying s.295-285 of the ITAA 1997) – all income and expenses are ignored for income tax purposes and no actuarial certificate is required.
Move forward to 30 June 2020, John’s TSB has increased to $1.68m, generated through investment returns. As a result of his TSB at the prior year being above $1.6m, the fund will be required to obtain an actuarial certificate for the 2020-21 financial year, with the tax exemption at 100%.
This amendment to the law once passed will remove this unnecessary requirement for an actuarial certificate for the 2021-22 and future financial years, providing a cost saving to the fund trustee(s).
No integrity benefit
The requirement of an actuarial certificate in the context of disregarded small fund assets was introduced as an integrity measure to ensure that funds could not ‘cycle’ assets between the accumulation and the retirement phase phases. Where a there are no assets within the fund supporting accumulation phase interests (i.e. 100% tax exempt), even when s.295-387 would apply, the need for an actuarial certificate adds no integrity value.
The amendment goes to the heart of reducing costs and removing unnecessary red tape for those funds that are affected. It is a little overdue, but better late than never.