How to maximise ECPI is an important consideration. The higher the ECPI the less tax you pay. So clearly important to get right.
How To Maximise ECPI
To maximise ECPI you need to think strategically about transactions. Your actuary calculates your SMSF’s exempt income proportion as the average value of retirement phase liabilities / average value of superannuation liabilities. The calculation uses a daily weighted average. So the timing of transactions impacts ECPI.
To maximise ECPI you want to maximise the average of retirement phase liabilites. And minimise the average of non-retirement phase liabilities over the income year.
So to maximise retirement phase liabilities make pension payments and lump sum payments as late in the year as possible. And commence a pension as early as possible.
To minimise non-retirement phase liabilities make withdrawals from accumulation as early in the year as possible. And contributions into accumulation as late in the year as possible.
Think about the timing for one-off large transactions or events as they will have a greater impact than smaller regular transactions.
Reversionary v Death Benefit
But it is not just the timing of transactions that impacts ECPI. Whether an SMSF pays a pension as a reversionary income stream or a death benefit income stream can also impact ECPI. And the reason for this is the timing for TBAR.
Where the reversionary or death benefit income stream would cause the receiving member to exceed their transfer balance cap, you need to commute amounts to accumulation. Or take some of the death benefit as a lump sum.
For a reversionary pension the receiving member has 12 months to sort things out. The credit to their transfer balance account for the value of the income stream will apply 12 months after date of death. So for 12 more months the deceased member’s pension can continue to run in pension mode irrespective of the receiving member’s current transfer balance account.
For a death benefit income stream things need to get sorted out as soon as practicable after death. And that usually means 3 to 6 months. The receiving member will receive a transfer balance account credit of the value of the death benefit income stream at the time it commences to be paid. So where action needs to be taken to avoid an excess transfer balance the fund’s ECPI claim for the current year may be reduced compared to if the income stream was automatically reversionary.
Please listen to our interview with Melanie Dunn of Accurium for more details.
Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only. It might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s personal circumstances.
Last Updated on 19 November 2018