SMSF may be missing out on being able to use the segregated method when calculating exempt current pension income (ECPI) because trustees and members believe they need to have segregated assets, according to an SMSF technical manager.
Act2 Solutions technical manager Rebecca Oakes said the most common misconception her firm was seeing was understanding the eligibility to use the segregated method.
“For the 2017/18 financial year and onwards, actuarial certificate providers need to ask if the SMSF is eligible to use the method for the given financial year,” Oakes said.
“The common misunderstanding we see back from clients is: ‘The fund does not have any assets set aside to be segregated, so it must not be eligible to use the segregated method.’
“That is not how you should answer the question because what is being asked is if the fund wanted to use the segregated method, could it do so? Would it be allowed?”
She made the comments as part of webinar hosted by Smarter SMSF chief executive Aaron Dunn, who added that segregation for ECPI purposes can be viewed in number of ways that were unrelated to assets.
Oakes noted: “At the start of a financial year a fund can set aside an asset to be segregated, but from 1 July 2017 a different type of segregation was implemented.
“Where a fund is eligible to use the segregated method, and there are periods during the financial year where the fund is solely supporting a retirement phase, those periods are deemed segregated, and the fund has to use the segregated method for that time.”
Dunn pointed out SMSFs that were in 100 per cent pension phase for the whole year underwent a form of segregation already as investment returns were proportionally allocated to members who did not need to get an actuarial certificate in those circumstances because the fund was solely set aside to discharge pension obligations.
Oakes agreed with this view and pointed out the 2017 shift was key to understanding how to view segregation.
“Prior to 1 July 2017, people were familiar with the concept where there could be an entire year where the fund supported retirement phase, and it was segregated, but from 1 July 2017 the period could be much shorter, even one or two days, and it would also be segregated,” she said.
