Actuarial method could compromise advisers

The method by which an actuarial certificate is formulated to determine the amount of exempt current pension income (ECPI) an SMSF has when the fund has used a combination of the segregated and unsegregated method when accounting for its assets in one financial year can have ramifications for advisers and the service they provide, according to a specialist SMSF law firm.

The situation has been highlighted by the ATO’s insistence an actuarial certificate is required to claim ECPI even if an SMSF has used the unsegregated method for only one day of the year.

DBA Lawyers special counsel Rebecca James noted there are two ways ECPI calculations are performed.

“As I understand it, the way a lot of actuaries would typically calculate the actuarial certificate is they would just average it out over the year. So they would say you’re unsegregated for one day of 365 and do the actuarial certificate effectively on an unsegregated basis for the entirety of the year with just one day’s exposure,” James noted.

“But the way the ATO thinks the legislation works is that you would look at each segment – so you’d look at the first part of the year as segregated and work out your exempt proportion on that basis and then you would look at the one day and get an actuarial certificate for just that one day.”

She said the method chosen has a significant effect on trust returns, which in turn has implications for advisers who have to prepare a true and accurate tax return for the fund.

“If we’re unsegregated at 30 June and segregated for the rest of the year, and we get a trust return as at 30 June, then that trust return is fully exposed to tax,” she warned.

“Whereas, if we average the income over the whole year, we’re paying a very small nominal amount of tax in all likelihood.”

She pointed out the situation was further complicated for advisers due to a special concession the ATO has granted.

“For 2017, the ATO has come out and said there will be an administrative concession if the actuary does average the actuarial certificate over the whole year,” she said.

“And that puts advisers in a difficult position because the tax return must be true and correct, but we’ve got this issue here where the ATO [has a] black-letter-law interpretation but then they’ve [at the same time] given an administrative concession just for a specific income year.

“Now of course advisers are entitled to rely on ATO material in determining that they’re acting reasonably in assisting clients in preparing tax returns, but it does create an issue.”

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