Two major accounting bodies have called on the federal government to alter its proposed method for the calculation of exempt current pension income (ECPI), as well as the indexation of the general transfer balance cap when dealing with disregarded small fund assets (DSFA).
The call was made by Chartered Accountants Australia and New Zealand (CAANZ) and CPA Australia in a submission to Treasury where the two bodies stated they understand the practical intention of a proposed amendment to permit trustees to choose how to calculate ECPI, but believed it would have unintended consequences for all superannuation funds.
The submission, written by CAANZ superannuation leader Tony Negline and CPA Australia financial planning and superannuation policy adviser Richard Webb, noted “it will only be the case for a small minority of superannuation funds, where the segregated current pension assets method and proportionate method produced the same ECPI”.
They added that for many funds it was likely different outcomes could result from these two methods as trustees would be able to move into and out of both methods at multiple times throughout the year.
As a result of this movement, “it will be necessary for trustees and their tax advisers to carefully model each available option to ensure they are maximising their beneficiaries’ best interests and are not breaching a trustee covenant”.
“As a result, we believe this potential change may lead to greater complexity for some funds and hence greater costs for them. Our preference is that the government does not proceed with this suggested amendment,” they said.
The two bodies instead, referring to a CAANZ 2018 pre-budget submission, suggested the ECPI rules be amended to allow greater flexibility for funds with a mix of pension and accumulation money for part of the income year.
In the most recent submission, the two bodies noted that where any portion of a fund was not fully in pension phase for part of an income year, and the assets were not segregated, SMSF trustees were required to use the proportionate method to determine ECPI and obtain an actuarial certificate for that part of the year if they did not want to pay income tax on fund earnings during that period.
“Up to the 2016/17 financial year, it had been industry practice for funds in this situation to obtain an actuarial certificate for the whole of the income year. The ATO allowed this practice to be used for the 2016/17 financial year, but not for future financial years,” it said.
“The requirement to obtain an actuarial certificate for part of an income year is onerous and expensive for SMSFs. We do not believe this past industry practice led to revenue leakage given the method that actuaries typically employ to determine the ECPI percentage.
“Consequently, CAANZ suggested that a regulatory amendment be provided to permit industry practice to continue indefinitely.
“It is the view of the major accounting bodies that this recommended amendment would provide the greatest reduction in red tape for the small fund sectors in relation to the calculation of ECPI.”
The submission was supportive of the proposal to permit small superannuation funds that satisfy the DSFA definition, and that only have member interests that are super income streams in the retirement phase, to use the segregated current pension assets approach for the calculation of their ECPI.
In providing this support, the two bodies also called for the DSFA definition, which applies for individuals with a total superannuation balance of more than $1.6 million, to be aligned with the general transfer balance cap and thus be indexed in the same way.
“We also request that this change be backdated to 1 July 2017. This will only have an impact from 1 July 2021, which is the first year the general transfer balance cap has been indexed since July 2017,” they said.
