SMSFs required to measure exempt current pension income (ECPI) are not locked in to using the same calculation method each year and can switch between the segregated and proportionate method, but must minute that decision when made, according to an actuarial firm.
Lime Actuarial managing director Greg Einfield noted it was possible to choose the ECPI calculation method that gives the best result for a particular financial year and the ability to switch was accepted under superannuation law.
“The good news is there’s no problem with switching at all,” Einfield said.
“You are permitted to use the segregated method to calculate ECPI one year and to use the proportionate method the following year, and to keep flip-flopping back and forth every year, depending on which one is going to be more beneficial for you.
“There is no problem with that whatsoever, so you really do need to give some thought each year as to which method is going to be better for the fund.”
He said the ATO does not view this as a form of tax avoidance and superannuation laws give SMSFs that choice each year.
“The ATO has been, from my understanding, very clear with the industry that there’s no problem with switching your choice from one year to the next, but they do require you to keep some minutes regarding the ECPI calculation choice,” he shared.
Einfield emphasised, though, SMSFs had to make their choice of calculation method before lodging the fund’s annual return, but should actually make that decision sooner.
“In practice, you will need to make this choice before you request your actuarial certificate because you need to tell us which method you are choosing; that’s when you make the choice. You do not need to make it in advance and every year you can change the approach that you take,” he said.
“How do we go about documenting this choice? As with many things in an SMSF, you need to prepare some minutes along the line to show the choice you made.
“The default is the segregated method and if you use the default method, you don’t need to document anything, but if you want to use a proportionate method, you will need to document that.”
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