A sector specialist has reminded practitioners a default option applies if a choice is not made as to how exempt current pension income (ECPI) will be calculated for an SMSF.
Smarter SMSF education and technical manager Tim Miller reaffirmed changes introduced in 2021 allow trustees to select whether they use the proportionate method for the entire year or a combination of it and the segregated method if the fund experiences a period when it is entirely in pension phase and one where an accumulation account exists along with the presence of an income stream.
He stressed the latter will apply if an election is not consciously made.
“It’s effectively a formal choice that the trustees make and from an administrative point of view, it’s really a question that needs to be asked of trustees whether they qualify for the choice or if they’re going to use it,” Miller told delegates of a SuperGuardian webinar held last week.
“The trustees have to choose it before submitting the fund’s income tax return. It’s not formal, you don’t need to tell the ATO, but you do have to effectively acknowledge and accept it within the fund’s situation,” he explained.
According to Miller if an ECPI calculation method is chosen then documenting the decision is very important.
“You need to document this and keep records of the choice so that you can justify the calculations that have been done within the fund to support the actuarial certificate,” he said.
“If no choice is made, then the default approach [will be used] and you’ll need an actuarial certificate, which is broken down into various periods.”
He emphasised the chosen calculation method will likely be ineffective if trustees fail to meet the minimum pension requirement.
“If you do all of that work and then fail to pay the minimum, all that work has been totally wasted from a concept point of view because the pension just ceases at the beginning of the previous year where the pension has failed,” he said.
“That’s why it’s so important that we’re ensuring our clients pay their minimum pensions.”
