Beyond ECPI Deemed Segregation Comparisons
Trustees and administrators are well aware that this financial year they will
need to make a choice between two different ECPI calculation methods if deemed
segregation applies. In previous years, many would have avoided the extra
administrative hassle of deemed segregation by keeping a small accumulation
component for the full year. Now, the opposite imperative applies in order
to have the option to choose the method that produces the lower tax. We tend
to think of this as a timing issue with capital gains or losses. What has
surprised me is how big the difference can be with simply the timing of dividends
and franking credits in our test cases.
There are other administrative ramifications besides
the fundamental tax issue and that is the focus of this blog. Trustees must
have a crediting philosophy and justify expense deductions. These are c
omplicated by the deemed segregation issue.
Before the commencement of a pension, trustees must
establish the value of the assets supporting the pension on the commencement
day of the pension. This needs to be objective and justifiable i.e., usually
the market value. The unrealized gain or loss in that market value may vary
considerably by the end of the year. In a large fund, the “interim crediting”
of exits (for example) will have a limited impact on the year end allocations.
This may not be the case in a SMSF with a small membership. In essence, the
requirement to report pension start values does not preclude doing a full year
crediting in a fair and equitable manner. The report needs to include the ECPI
percentage excluding segregated assets and overall fund information for year
end allocations. The latter needs to be broken down by member.
With expenses, there is not a prescribed method for
calculating the deductibility and simply must be an approach that can be
justified to the Commissioner as appropriate. The two methods most used
are one based on (1 – the actuarial exempt income proportion) or that set
out in TR 93/18. The latter is:
(Assessable Income x(1 - actuarial exempt income percentage) + NCC + CC + rollovers)/
(Assessable Income + NCC + CC + rollovers)
The second approach tends to produce a larger deduction. Again, where there is a
deemed segregation, the calculations need to be reworked to take all
components into account.
The wheel has turned. After being an advocate
for more automation in actuarial certificate generation over the years
the current complexity means more hands-on oversight is essential.