Financial advisers can help their clients avoid having their SMSF switch between the segregated and unsegregated methods for exempt current pension income (ECPI) calculation purposes at different periods throughout a given financial year by maintaining a small asset balance of the fund in accumulation phase, a technical expert has said.
Speaking at the SMSF Professionals Day 2018, co-hosted by SuperConcepts and selfmanagedsuper, SuperConcepts SMSF technical services executive manager Mark Ellem told delegates: “Each time the client wants to transfer assets, perhaps from additional contributions, from accumulation to pension phase, rather than putting all of the accumulation benefit into retirement phase they should leave an amount in accumulation.
“So for the entire year you’ve got an accumulation account.”
Ellem pointed out that while this is a convenient strategy to maintain the use of the unsegregated method of calculating ECPI throughout the year, it may not produce the most tax-effective outcome in all circumstances.
“That will work where your income is fairly uniform throughout the year, but what happens if you have a lumpy amount of income coming into the fund at some point during the year, for example, the fund sold an asset with a large capital gain?” he said.
“The member would really want you to have the fun of doing the more complicated accounting so that the entire gain would be exempt rather than having that smaller accumulation account and having most of the gain exempt but some of it as assessable.”
He added if the fund sold an asset for a capital loss, then the client would want the unsegregated method of calculating ECPI to be used. To this end, he said it was important for advisers to constantly communicate with their clients so the most appropriate strategy can be implemented in every situation.
With regard to how much to leave in the accumulation account, transaction costs and investment performance had to be taken into account to ensure these elements did not erode the accumulation account balance to zero in a short space of time, he said.