‘Easy way’ not always best when calculating ECPI

ECPI reporting process

The upcoming changes to ECPI will have the overall effect of complicating the reporting process for funds, an SMSF expert says.

The change to exempt current pension income (ECPI) announced in this year’s federal budget will complicate rather than simplify the reporting process, according to an SMSF technical expert.

SuperConcepts technical services and education general manager Peter Burgess said the change, which would give SMSFs the choice as to how to calculate ECPI, was particularly relevant to clients who had segregated and unsegregated assets during the course of the income year.

“Under the current law, when we calculate ECPI, we can only apply ECPI to income derived when it was unsegregated,” Burgess told the Chartered Accountants Australia and New Zealand 2019 National SMSF Conference in Sydney this week.

“What they’ve announced in the budget is that trustees would be given the option of either using the current law, or they can revert back to the old way of doing things, which is apply the actuary’s ECPI percentage to all the income derived by the fund during the course of the year.”

He pointed out simply reverting to calculating ECPI using the old methodology because it might be considered the “easy way” by accountants and advisers was not necessarily in the best interests of the client.

“I don’t think it’s a case of just going back to the old way of doing things. We’ve had a taste of the new way. The new way is where we only apply ECPI to income derived when the fund was unsegregated and in some cases it gives you a better tax result for the client,” he noted.

He said the overall effect of the change to ECPI was to make the reporting process more complicated for funds that had segregated and unsegregated assets during the course of the income year.

“Whilst this measure was announced as a ‘reducing red-tape measure’ and [one that] simplified the rules, I’m not sure it’s going to have that effect. If anything, it’s going to make things more complicated because we will all have to do two calculations,” he noted.

“You can’t simply just use the old [method]. In some cases, your client is better off with the new approach.”

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