The timing of a fund transaction is critical in maximising the amount of exempt current pension income (ECPI) that can be claimed by SMSF trustees, and advisers should be thinking ahead to help clients plan these events, according to an actuarial services provider.
Accurium SMSF technical services manager Melanie Dunn said it was possible to maximise the amount of ECPI available to funds, using the proportionate method, on both capital gains and general assessable income by maximising the exemption income proportion average calculations.
“It comes down to understanding the actuarial proportion and the actuaries percentage is the average value of the fund’s retirement-phase liability, such as account-based pensions, TRIS’s (transition-to-retirement income streams) in retirement phase and market-linked income streams, divided by the fund’s total super liabilities, such as retirement income streams plus all non-retirement-phase interests,” Dunn said in an address to Class Connect 2019 in Sydney earlier this week.
“To maximise ECPI, we want to maximise this average calculation.”
She noted an ‘average calculation’ was not arrived at by adding the starting balances to the closing balances and dividing by two, but by taking a daily weighted average, “which means the size and timing of transactions throughout the year will impact the exempt income proportion”.
“To maximise this formula, we want to maximise the average retirement-phase balance, so anything that increases that figure should be done at the start of year if possible and anything that will reduce it, such as pension payments, should be done towards end of year,” she said.
“It will be the opposite for the accumulation or non-retirement-phase interest, which we want to reduce, so anything that will do that should be done at start of year, such as lump sum or accumulation withdrawals, and anything that will increase it, such as contributions, should be done at end of year.
“By understanding the formula, we can help maximise ECPI for clients in any given year. By thinking ahead to the timing of transactions, we can do the same.”