The Australian Taxation Office has confirmed that self-managed super funds will be required to use the so-called “segregated method” to calculate tax exemptions for superannuation pension income.
In what is a contentious decision, the ATO has sugared the pill by committing not to take compliance action where a different approach is used in 2016/17 and prior years.
Several commentators, including the Actuaries Institute, raised concerns about the way the ATO was interpreting new superannuation rules that relate to pension accounts but the ATO has stuck with the position it flagged a few months ago.
The ATO has issued an SMSF alert, saying that where a fund is wholly in pension phase for all or part of any income year, all the fund’s assets will be deemed to be segregated current pension assets.
The ATO says: “For any portion of an income year that an SMSF is not wholly in pension phase, for example its members have a mix of pension phase and accumulation phase interests for part of the year, and the SMSF’s assets are not segregated, the SMSF trustee will be required to use the proportionate method to determine exempt current pension income for that period.”
The Actuaries Institute has objected that this treatment would force many funds to use two different methods, the segregated and unsegregated, to claim exempt current pension income, adding administrative complexity.
The Actuaries Institute says: “Asking SMSFs to comply with this interpretation will increase compliance costs and cause disruption for the industry with no discernible difference in tax revenue.
“The accounting processes for funds using the segregated and unsegregated methods are different. By deeming certain assets to be segregated, the ATO will force many funds to use both methods during the same year.”
Under superannuation rules, fund trustees can elect for certain assets to be “invested, held in reserve or otherwise dealt with” for the purpose of enabling the fund to discharge its pension liabilities. In this way, those assets are segregated to support income streams.
Where a fund’s only liabilities during the year are in respect of prescribed income streams – that is, it is solely in pension phase – the fund’s assets are taken to be segregated current pension assets and all are income tax exempt.
The other way of claiming exempt current pension income is to use the unsegregated method, which requires that the calculation of the tax-exempt portion excludes liabilities in respect of assets that have been set aside as segregated current pension assets.
Industry practice has been that unless a fund is solely in pension phase for an entire come year, the trustee can elect to use either the segregated or unsegregated methods when claiming exempt current pension income.
The ATO says: “We acknowledge that there may be some industry practices that may not be in accordance with the ATO view of the law regarding the calculation of exempt current pension income.
“Therefore, we have made an administrative concession with respect to our compliance approach for the 2016/17 year and prior. In relevant circumstances, SMSF trustees will not face compliance action for prior years’ calculations where those calculations were based on an industry practice that is not consistent with our view of the law.”