At the recent Institute of Chartered Accountants Australia (ICAA) National SMSF conference in Melbourne (Sept 2013), Assistant Deputy Commissioner of Superannuation, Stuart Forsyth, discussed the ATO’s regulation of SMSFs. In particular, Forsyth announced the ATO’s plans for 2013-14 including a more comprehensive audit of exempt current pension income (ECPI). Forsyth confirmed that the ATO will be checking 1,100 ECPI calculations.
Exempt current pension income is often the largest deduction available to SMSFs so there can be significant tax consequences if the deduction is denied by the ATO.
The ATO may not allow all or part of the deduction if:
- the fund does not meet the minimum pension standards on any of its superannuation income streams
- an actuarial certificate was not obtained for funds claiming ECPI using the unsegregated method
- ECPI was calculated incorrectly for the fund
The above parameters are crucial in ensuring the fund ticks all the boxes to correctly claim ECPI each year.
Claiming Exempt Current Pension Income (ECPI)
Once a SMSF has commenced paying a pension, the income earned on the assets backing the current pension liabilities is eligible to be claimed as exempt from income tax. Exempt current pension income is determined under Section 295.390 or Section 295.385 of the Income Tax Assessment Act 1997. ECPI is calculated each financial year and reported in the SMSF Annual Return.
ECPI = ordinary assessable unsegregated income (excluding contributions and non-arms length income) x actuarial tax exempt percentage + segregated current pension income
For more information on claiming ECPI in the 2012/13 SMSF Annual Return read our blog article on that topic: ECPI and the SMSF Annual Return
If you choose to claim ECPI using the unsegregated method then there are a number of strategies you can employ to maximise your ECPI deduction.
Some general strategies are:
- make contributions later in the financial year
- start pensions earlier in the financial year
- make pension payments later in the financial year
More information on maximising ECPI can be found in our blog articles on those topics:
Meeting the requirements to claim ECPI
Not meeting the minimum pension standards is the most common reason for a fund to be ineligible to claim ECPI.
We have a number of articles available which can assist you in making sure the fund is eligible to claim ECPI:
How we can help
At Bendzulla we pride ourselves on understanding the complex issues surrounding ECPI calculations. The ATO’s increased scrutiny of exempt current pension income provides even more reason to order your actuarial certificates from Bendzulla Actuarial. We analyse the information that we receive and address any irregularities with our clients. Actuarial certificates are prepared by our onsite actuaries and analysts which also reduces the risk of incorrect calculations
We will soon be launching a new ECPI Report to help clients calculate the ECPI for their funds, and give some comfort that the deduction used in the Annual Return is correct. The report will be available through our online membership system and will use information provided in your actuarial certificate applications to help calculate the ECPI deduction.
We offer free telephone service for our clients, and are happy to discuss any questions you have regarding your ECPI calculation and compliance.
Freecall: 1800 203 123Author: Melanie Dunn