While NetActuary will diligently work to ensure administrators achieve appropriate ECPI outcomes taking recent changes into account, this note will provide useful background information – especially with “deemed segregation” and “disregarded small fund assets”. No comments will be included below on funds that include legacy defined pensions (a separate note will be prepared for those).
Elected or Deemed Segregation
Until the 2017/18 year it was common practice to issue an unsegregated actuarial certificate as long as there was an accumulation account at some stage in the financial year. The ATO’s view – which they will now enforce from the 2017/18 and subsequent years – is that one can have segregation under sec 295.385 of the ITAA 1997, even if the period fully in retirement phase is for only part of a year. Consequently, one can have both segregated and unsegregated components in the same financial year. In fact, one can have a number of segregated periods, each having to be separately accounted for – including asset revaluations – but only one residual unsegregated actuarial certificate. The extra administrative effort can be avoided (which may or may not be in the client’s best interest).
Elected segregation is the old fashioned, conscious decision to segregate and separately account for some of the assets.
We need to be careful about what is exempt and what is not. A new term – “retirement phase liabilities” has been introduced. So, we have:
Retirement phase liabilities being:
- Account based pensions
- Market-linked income streams
- Transitional retirement income streams (TRIS) in retirement phase; and
Non-Retirement phase liabilities being:
- Accumulation account
- A Reserve Account
- A TRIS not in retirement phase.
A TRIS is in retirement phase and counts towards tax free earnings after age 65 or once the trustee has been notified that a nil cashing restriction condition of release has been satisfied. A Transfer Balance Account credit notification must be made. The TRIS in retirement phase is still not an ABP, although some practitioners feel this should be fixed up. The same applies to issues around death benefit income streams.
Disregarded Small Fund Assets
If at 30/06/2017 (and each subsequent period) a member was in retirement phase and had a Total Superannuation Balance (TSB) above $1.6m in any fund and there was a retirement phase benefit in the fund at any time in 2017/18, the SMSF is classified as having “Disregarded Small Fund Assets”. In this situation the fund is not allowed to use the segregated method for ECPI. One will note that is necessary to ask clients what their superannuation assets are in all their funds. Unsegregated assets are covered in section s295.390 of ITAA 1997. If the trustees want to claim ECPI they need to get an actuarial certificate. The calculated ECPI proportion applies to assessable income and net capital gains earned on assets which were not segregated. Where the value of pension assets has grown above $1.6m it is possible that an actuarial certificate is needed – even if solely in pensions i.e. 100% exempt.
Avoiding Deemed Assets
Having to account for and revalue assets for a number of periods within a year is more administration work. This can be avoided if (say) $100 was kept in an accumulation account at all times during the year.
The issue is that – just like the elected segregation – one or other option may give a better tax outcome. If there are non-uniform gains or losses e.g. a property sale, the extra administration may be worth it. Even items such as dividends may not be uniform over the year. This area is interesting but more of a strategic plan ahead issue rather than an actuarial certificate production issue. There are many actions that optimize tax and TBC outcomes. These can be as simple as making pension commencements and Lump Sum Accumulation withdrawals early in the year and contributions late in the year. From a TBC perspective, it’s better to have amounts above minimum payment requirements as a commutation, not as a pension.
The unsegregated ECPI percentage is used also to claim an expense deduction. It is important to observe we are talking about tax calculations and the trustees may adopt a different approach for member allocations.
Keeping It Simple
Most funds will not have the above issues. An innovation on the NetActuary data-forms (and in evaluating the SMSF admin general ledgers submitted) is only to ask the usually required questions and have a “less usual” checklist advice. These are also the areas we watch out for in that they may affect outcomes and require more information.
- Are there legacy defined pensions?
- Is there “deemed or elected segregation” in the year?
- Are there “disregarded small fund assets”?
- Did the fund commence or wind up in the year?
- Does the fund have a reserve account?
- Is there any non-arms length income?
- Did a member pass away during the year or have insurance proceeds been received?
NetActuary is the renamed company in the previous Bendzulla group of companies that provided actuarial certificates. In recommencing these services, we have the ambition to be the pre-eminent source of quality support for the area. That includes funds with legacy defined pensions.
Please ‘phone Brian Bendzulla on (03) 6224 1145 if we can help.
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