SMSF practitioners should not rely on actuaries to recommend the best method for calculating exempt current pension income (ECPI), but can apply general rules when making that decision, according to an SMSF actuary.
Lime Actuarial managing director Greg Einfield said his firm would not recommend whether to use the segregated or proportionate method to calculate ECPI and it was unlikely other firms would do the same due to some of the complexities involved in making that choice.
“We have had conversations about this and agreed it is too difficult because we don’t have all the information we need to get that choice right every time,” Einfield said during a recent online briefing.
“We would need to know all of the income that has been earned, the timing of that income and whether or not that income has come about due to capital gains, and perhaps if there are franking credits associated with that. We would also need to understand any tax losses, and the timing and status of all of those tax losses.
“There is a lot of information we need to understand that makes it very difficult for us. We don’t have all that information and administration platforms won’t be giving it to us.
“For those that request actuarial certificates manually, we would need to make our forms about three times as long as what they are at the moment, so we won’t be making that recommendation to you.”
He suggested that in the absence of such a recommendation, SMSF advisers and accountants could use a rule of thumb to help clients reduce and minimise their tax when calculating ECPI.
“If the income is earned evenly throughout the year, it doesn’t matter from a tax perspective which method you use,” he said, adding he preferred the proportionate method in this circumstance, but either method made little difference to the tax outcome.
“If you have large capital losses, then you probably want to use the proportionate method so you can carry forward a larger amount of those losses into the future year.
“If income is front-ended or back-ended, then you want to align the highest ECPI percentage with the highest income.
“In this case find the time of the year when you got a large capital gain or large portion of income and ask: ‘How can I make the ECPI as high as possible in that period?’”