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ECPI impacts tax loss treatment

ECPI tax loss

SMSF tax losses carried forward from a prior year will need to take into account the calculation of exempt current pension income if the proportionate method has been used to do so, a technical leader has said.

A technical expert has drawn the attention of advisers and trustees to the effect the calculation of exempt current pension income (ECPI) using the proportionate method can have on the treatment of carried forward tax losses incurred by an SMSF.

Specifically, Accurium SMSF technical services manager Melanie Dunn said the situations in question are where trustees are looking to utilise tax losses carried forward having been incurred in a previous financial year.

“Before we [can apply these tax losses] we need to complete a calculation. We can’t simply take the tax loss we’ve carried forward and claim that as a tax loss deduction,” Dunn told attendees of the latest Accurium technical webinar held last week.

“Where we have a fund that has a retirement phase interest and is claiming ECPI there are some adjustments that need to be made,” she added.

According to Dunn, the first of these adjustments dictates a calculation of the net ECPI amount needs to be performed. This is the ECPI amount for the relevant financial year less the expenses incurred in the course of deriving that exempt income.

“Once we have that net ECPI [figure] we actually have to [subtract this number] from the tax loss we carried forward from prior years, and only if the amount remaining is above zero, do we have a tax loss that we can claim as a deduction in the annual return,” she explained.

Dunn pointed out having to perform this calculation before carried forward tax losses can be used means advisers and their clients will have to assess the dollar amount of the tax losses very differently.

“[So with a] fund that has a retirement phase [interest] and is claiming ECPI you will need very significant tax losses carried forward before you actually end up in a situation where you’ll have a tax loss you can claim in the following year’s annual return because it’s very common for the carried forward tax loss to be wiped out, if you like, by net ECPI,” she said.

“So if you [have] a situation where you are claiming a tax loss deduction, just go back and check that you have correctly [deducted] net ECPI,” she advised.

Dunn also said the timing of SMSF transactions was an important factor when maximising the amount of ECPI a fund could claim using the proportionate method due to the formula used to derive the proportion applicable.

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