STRATEGY
Beware the ECPI implications The presence of exempt current pension income within an SMSF can hold other tax consequences for the fund. Mark Ellem examines these scenarios. One of the significant benefits of starting a retirementphase pension is the tax-free status of the income associated with the pension, referred to as exempt current pension income or ECPI. While the rules for how an SMSF can calculate and claim ECPI have changed from the 2022 income year, an SMSF that has ECPI needs to be aware of the effect a claim for this pension income exemption may have on fund income tax deductions. MARK ELLEM is head of education at Accurium.
When deductions must be apportioned Where an SMSF claims ECPI, the expenses it incurs in deriving this type of income are not deductible. Many fund expenses will be incurred in deriving both assessable and exempt income and consequently must be apportioned so only the portion relating to the derivation of assessable income is claimed as a tax deduction. Some fund expenses, particularly those that have specific income tax provisions, can be claimed in full, despite a portion of the fund’s income being treated as exempt. The ATO sets out in its Taxation Ruling (TR) 93/17 the income tax deductions available to superannuation funds, including the methods to apportion expenses between deductible and non-deductible, where the fund has derived exempt income. ECPI will also have an effect on any broughtforward tax loss. A brought-forward tax loss must be first reduced by net ECPI before being applied against fund assessable income.
Which expenses to apportion? Expenses claimed under the general deduction section 8-1 of the Income Tax Assessment Act 1997 (ITAA) are required to be apportioned. Where there is a specific provision in the ITAA, reference must be made to the specific provision to ascertain if there is
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a requirement to apportion the specific deduction where the fund derives exempt income. Deductible fund expenses can be categorised as follows in relation to whether they need to be apportioned where the fund derives exempt income (see Table 1). Common SMSF expenses can be classified as in Table 2.
Approach to apportioning When claiming general expenses, under ITAA section 8-1, that have been incurred partly in gaining assessable income and partly in gaining exempt income, you can again refer to TR 93/17 for guidance on apportioning expenses. This type of situation can arise when an SMSF has a member or members with both retirement-phase interests and non-retirement-phase interests. Paragraph 7 of TR 93/17 states: The correct method for apportioning expenditure between assessable income and non-assessable income depends on the particular circumstances of the case. If there is a single outlay in respect of a thing or service, only part of which is used for gaining or producing assessable income, then the following principles apply: 1. If a distinct and severable part of the thing or service is devoted to gaining or producing assessable income and part is not, the expenditure can be apportioned according to the ratio of those parts, and 2. If an outlay serves both objects indifferently, another method must be used to apportion the expenditure which gives a fair and reasonable assessment of the extent to which it relates to assessable income. In relation to expenditure of an indifferent nature, the ruling provides two apportionment methods. 1. Apportionment for expenses incurred in deriving investment income only: Expenditure x (assessable investment income/ total investment income). From a practical perspective, this is commonly referred to as the actuarial method and effectively
