Head of Product at Heffron and SMSF industry expert, Meg Heffron, describes the challenges the changes to exempt current pension income has had on the industry and how we saw this as an opportunity to raise standards.
Actuaries are celebrating a rare moment of celebrity at the moment as software providers and accountants grapple with the new rules for actuarial certificates and exempt current pension income (ECPI – the tax exemption on investment income claimed by funds paying pensions).
In a nutshell, from 2017/18 three important things have changed:
- Transition to retirement pensions that are still being paid to a member who has not retired, turned 65 or met another “full” condition of release, no longer give rise to the exemption. Instead, ECPI is restricted to retirement phase pensions (pensions being paid to someone who has retired, turned 65 etc);
- Some funds are no longer allowed to claim their ECPI on a "segregated" basis. This means that those funds can't choose to segregate (ie set aside a specific group of assets to provide pensions). But it also means they will never be deemed to be segregated even if the fund is exclusively providing retirement phase pensions for all or part of the year.
- All other funds (ie those that are legally allowed to segregate) will be deemed to be segregated at any time when they are exclusively providing retirement phase pensions. This will apply even if they are only in this position for part of the year.
The funds that are not allowed to claim their exemption using the segregated method are those that had at least one member at the previous 30 June (ie 30 June 2017 for the 2017/18 financial year) who had:
- a Total Superannuation Balance (across all superannuation funds) of more than $1.6m; and
- a retirement phase pension in place.
While the rules changed over 12 months ago, their impact is being felt now as accountants start to lodge 2017/18 Annual Returns.
Major changes were required to the administration software used to prepare SMSF financial statements and tax returns (eg Class, BGL) as well as the calculations carried out for actuarial certificates. Both Class and BGL (the two providers who support Heffron’s actuarial certificates) have already released comprehensive updates to their software and together we are helping clients with actuarial certificates that comply with all the new rules.
Nonetheless we expect adjusting to the new world will still present challenges for accountants and advisers. While the rules are conceptually simple they prompt quite a profound shift in current thinking. We’ve bumped into quite a few interesting challenges already!
Answering the “can this fund segregate” question is theoretically simple but with a few quirks. To help, Heffron has developed a wizard that steps through the process in a simple question and answer style.
Even once that is well understood, instinctively anticipating the implications is another matter. In the new world:
- two apparently identical funds will potentially see completely different tax results (simply because one can and must be treated as segregated for part of the year while the other is not)
- slight differences in behaviour by trustees could make the difference between being able to segregate or not (we covered this in our recent Super Insights article – A new world of tax exemptions for pension funds)
- accountants and advisers will often need to understand the balances their clients hold in all superannuation funds, not just the SMSF, to predict how ECPI will be determined in the SMSF
- funds that are allowed to segregate and have multiple events during the year that cause them to switch between being entirely in retirement phase pensions and having a mix of different types of accounts present particular challenges. Their accountants will need to effectively break the fund up into multiple accounting periods and apply the actuarial certificate percentage to just those where the fund is not entirely in retirement phase pensions.
At Heffron, we are helping accountants and advisers through these changes in several ways. Our first priority is always to empower our clients via articles and education. This is where our special blog channel and dedicated web content together with a detailed technical paper and free webinar play a role. We will be including a comprehensive examination of the new rules as well as the strategic opportunities and risks they present in our upcoming Heffron Super Intensive Day.
When you need to understand something, Heffron’s technical information and advice is always in plain and simple language. Heffron makes life easy and is really good value for the cheapest certificates on the market. We will always rely on Heffron. - Hayley Pilkington, Accountant, Sinclair Wilson
We have obviously completely updated our actuarial certificate calculations to ensure we comply with the new rules and provide accountants with a streamlined, simple and low-cost solution to obtaining actuarial certificates via their SMSF administration software. Our technology also gives us a unique ability to provide new tools – starting with our simple decision wizard to help understand whether a particular fund can / must claim its ECPI using the segregate method and how its investment income will be taxed.
"Thanks Heffron for adding Live Chat. It is a great new feature and I am sure it will be used a lot given the changes to Actuarial certificates this year" - Rayleen Ableson, Evolution Advisers
Choose Heffron through BGL360 or Class when you order your actuarial certificates to experience the full service.