In May, draft legislation was released to amend the rules by which exempt current pension income, commonly referred to as ECPI, is to be calculated in the future. There were two elements to this proposal.
The first was fairly straightforward and a move that could be considered a no-brainer. Basically it was to do away with the disregarded small fund assets rule.
Under this provision, SMSFs with a member who had a retirement-phase interest, that is, was drawing down a pension, and had a total super balance of $1.6 million as at 30 June of the financial year in question was deemed to have disregarded small fund assets.
Further, funds with disregarded small fund assets were prohibited from using the segregated method to calculate ECPI and as such had to use the proportionate method for this tax calculation. It also meant funds solely in pension phase for the entire financial year with disregarded small fund assets had to obtain an actuarial certificate before the ECPI calculation could be made.
Clearly this rule made no sense and only added to the administrative burden and cost of running an SMSF, so scrapping it would obviously reduce unnecessary red tape.
The second item in this draft legislation was to introduce the ability for SMSF trustees to choose the method by which they calculate ECPI should the fund be solely in retirement phase for a portion of the financial year and have both a pension-phase and accumulation-phase interest for another period.
The choices available being to calculate ECPI using the segregated method for the period of the year when the fund is entirely in pension phase and the proportionate method for the time when the fund has both accumulation and retirement-phase interests, or to use the proportionate method for the entire income year.
The provision of choice is usually regarded as a positive thing, but in this case it was highlighted by industry stakeholders it could actually lead to further complication and a potential increase in running costs.
One criticism of the legislation was that it could result in providers of administration and technical services having to produce a number of different ECPI calculations for trustees that could in fact be marginal in the potential outcome. In other words, a lot of additional work for very little benefit.
A separate argument against this provision of choice was questioning whether existing accounting administration software in the market could support both calculation methods. As such, should this software have to be upgraded to facilitate the change in rules it would likely increase the cost of running an SMSF.
This draft legislation led to the Treasury Laws Amendment (2021 Measures No 6) Bill 2021 to be tabled in parliament last month, which has now been passed and is awaiting royal assent.
Interestingly, this bill did not include the second measure allowing the choice of ECPI calculation measure. Could it be the powers that be took note of the industry’s response in pointing out the potential flaws associated with the original draft legislation?
One can’t be sure if this is the case, but it is a curious development. And if it is confirmed the measure was scrapped for this reason, that can only be considered a very good result and perhaps can raise our confidence the formulation of superannuation legislation in the future will be directed by common sense.
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