A technical expert has reminded advisers it is not compulsory for SMSF trustees to claim exempt current pension income (ECPI) where they are eligible to do so and that there are certain situations where not taking the tax concession is more prudent.
Accurium head of education Mark Ellem noted one instance where it would not be advantageous for an SMSF to make an ECPI claim is if the fund has made losses.
“If a fund has got losses, which means it’s in the same or not worse position than if I claim ECPI, then I might not bother to claim ECPI,” Ellem told delegates during a presentation at the Institute of Public Accountants National Congress 2022 held on the Gold Coast last week.
“It might be in a year the fund has losses brought forward from a prior year. It might be in the year where we first start retirement-phase pensions close to year end, maybe in June. [So it could be] the retirement-phase pension started in June so the amount of ECPI is not going to be high.”
To emphasis this point, he referred practitioners to an example on the ATO’s website that provides a comparison of having an SMSF claim ECPI and not claim ECPI in light of the fund having incurred losses. The example details a situation where an SMSF has $10,000 in tax losses brought forward and illustrates the effect claiming ECPI has on the ability for the fund to benefit from those losses.
“[In the example] the fund doesn’t get to claim the whole $10,000 [if it uses its ECPI entitlement]; it only gets to claim about $1080. [But] if you redo the calculation as if the fund didn’t claim ECPI and the ECPI didn’t have any effect on reducing that tax [loss brought forward], you actually get the same outcome,” he noted.
He advised practitioners to keep this scenario in mind and recognise claiming ECPI is optional even though SMSF trustees will more often than not take advantage of the income exemption.
