ECPI rules of thumb available

calculating ECPI

Practitioners can apply some rules of thumb to help their clients choose the most suitable method of calculating ECPI for a given financial year.

An SMSF specialist has suggested a few simple rules of thumb that will be of great assistance in their advice to clients as to the most appropriate method of calculating exempt current pension income (ECPI) for their super fund.

From the 2022 income year and beyond, the superannuation rules allow trustees to choose whether to use the proportionate method to calculate ECPI for the entire financial year or use a combination of the segregated and proportionate method, the default option, in the event of the SMSF being solely in pension phase during a period of the year and having both accumulation and pension interests at other times during that financial year.

“[Consider] some general rules of thumb [regarding the choice of ECPI method]. If the earning of income is consistent through the entire year, then either method will give you relatively the same tax outcome,” Accurium head of education Mark Ellem told delegates at a recent industry event.

“But if you have significant or lumpy income, and significant lumpy income is going to come from CGT (capital gains tax) events creating capital gains, [and the lumpy income] happens during the period of deemed segregation, then you’re not going to elect to apply the proportionate method for the entire year.

“Because if that CGT event happens during the period of deemed segregation, what do the rules say, it’s disregarded if you use the segregated method. So the whole gain is exempt. If the trustees apply choice and apply the proportionate method for the entire year, then you’re going to turn some of that capital gain into assessable [income].”

According to Ellem, advisers need to also be conscious of the opposite scenario.

“If there is a capital loss and you apply the default method, segregated for deemed segregation, the CGT event is ignored and the loss is lost. Make the election to apply choice and you get to retain that loss, which you might be able to carry forward and offset in other years,” he noted.

“If that CGT lump sum amount happens in a period where there is no retirement-phase interest, then the general rule of thumb is to apply the proportionate method because that will lift the ECPI percentage.

“And then if you’ve got it in both, you’ll need to do the comparison of outcomes.”

He warned practitioners to give proper attention to the trustees’ ability to choose the method of calculating ECPI they want to use regardless of the number of SMSFs in their client book that will be affected.

“Based on the number of [actuarial] certificates we issue each year, around 65,000 of them, this is only going to affect about 3 per cent of SMSFs, so you might think: ‘Mark, why bother?’” he revealed.

“Well I think this is important [due to the] low number [of funds] that it affects because you have to keep your eye out for those funds that may have choice and if they then have choice, [you have to decide] then what’s your next step as a practitioner.”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital