Lesson 8 - Create Entries Process with Unsegregated Actuarial Certificate

Objective

To demonstrate the processes performed during the Create Entries process, and specifically how the create entries process manages pension accounts.

Overview

Apply a pension percentage or allocate pension assets

Prior to the create entries process for any pension members, you must ensure that either an Actuarial Percentage has been input into the member mode screen (Task 3.5) or the Assets of the Fund have been allocated to the relevant pension members (see Lesson 9).

Actuary Certificates

Actuary Certificates are required depending on the circumstances of the fund. Refer to the Exempt current pension income section on page 31 of the ATO Form F Instructions which can be accessed from the Financial Reports | Tax Return data screen by clicking $image\atoinstructions.gif$ ATO Instructions. These instructions specify that the trustee can determine the exempt pension income using one of two methods:

If the fund segregates its assets so that the income can be identified as derived from the segregated pension assets to provide for current pension liabilities – that income is the exempt income.
If the fund’s income is derived from assets that are not segregated between current and non-current pension liabilities, the exempt portion is calculated as the ratio of unsegregated current pension liabilities to total unsegregated superannuation liabilities.

Refer to www.ato.gov.au for further information on where actuary certificates are required.

Non-deductible Pension Expenses

Taxation Ruling 93/17 deals with exempt income and the apportionment of expenditure. This ruling specifies that expenditure incurred solely in gaining or producing exempt income is not deductible and that expenditure incurred partly in producing assessable income and partly in gaining exempt income must be apportioned.

The correct method for apportioning expenditure depends on the circumstances of the fund. The Tax Office outlines two generally accepted methods of apportionment. Users should then calculate how much of the expenditure is deductible using the most appropriate ATO method and then record the non-deductible portion as a percentage in the Fund Details, Reporting screen. The most commonly used method of apportioning expenses is to apply the same percentage as the actuary percentage.

Where Expenses Percentage is left blank, expenses will be incorrectly treated as tax deductible and will be allocated to accumulation members only, giving an incorrect profit allocation between pension and accumulation members.

Part-year Create Entries

Simple Fund does not retain tax entries made by the create entries process during the year. At year end, all prior tax entries are deleted and new entries created based on the final year's tax results.

Earnings Allocations to Members

The Create Entries process firstly allocates profits from segregated (allocated) assets to the particular member the asset was allocated to. Any remaining profit is then allocated between the members based on a daily weighted member balance.

Tax Effect Accounting and Provision for Deferred Income Tax

Due to the tax exempt status of Capital Gains on pension assets, tax-effect accounting is not appropriate for full pension funds. This option can be switched off in the Fund Details, Reporting screen. However switching off tax-effect accounting will not automatically write back any Provision for Deferred Income Tax (PDIT) or Future Income Tax Benefit (FITB) in account 870. This will need to be journalled manually to the 493 clearing account Writeback of FITB/PDIT before creating entries. This was covered in Task 3.1.

Create Entries Report

The Create Entries Report details each of the transactions posted by the Create Entries process. This report is essential for auditors as it details:

Asset revaluation amounts
Calculations of permanent differences on revaluations
Calculations of timing differences
Calculations of permanent differences
Calculations of Exempt Pension Income
Reconciliation of Capital Gains/Losses Adjustments
A summary of tax entries
Asset income allocation to members
Calculation of the crediting rate for income allocated to members accounts
Calculations and postings for GST credits (only where GST registered is selected in Fund Details | Reporting)

Calculation of Exempt Pension Income

The Create Entries Report details the exempt Income derived from the Pooled Assets or linked segregated current pension assets. If you are reading the Create Entries report exempt income section and an income account does not appear in the exempt income listing, then the most likely cause is that a link has not been created between the asset and the income account.

Create Entries - Imputed Credits

The $image\check.gif$ Add imputed credits option in Fund Details | Reporting will post a credit to the dividend account (gross up) when Creating Entries. The total imputed credits received are then offset against Income Tax Payable by being debited to account 850/002 – Imputed Credits

Prior to the 2001 financial year Simple Fund will write back any excess imputed or foreign credits. From the 2001 financial year a full franking credit is available in respect of the entire franked portion of the dividend regardless of the fact that portion of the dividend may be exempt from tax due to current pensions assets. Refer to s160AQU(2)(a) for further details. The present legislation does not restrict the credits to the pension member and they can be offset against tax on dividend income and may also be offset against the taxation liability in respect of contributions to the fund that are subject to tax.

From a tax planning viewpoint many funds plan to have a sufficient portion of their portfolio invested in shares producing fully franked dividends to achieve this zero or refund tax position. Where a fund has a sufficient equity portfolio to cause franking credits to exceed tax on income, the fund may be entitled to a refund if the imputation credits.

Create Entries - Asset Revaluations – Allocating to Pension Members

Simple Fund will calculate the market value of each investment that is attached to a security on the Securities List. Simple Fund will post increases in market values to 247 or decreases to 330 in the Profit and Loss Statement. The investment account will be posted with the corresponding movement in market value.

Simple Fund will also calculate the part of the revaluation that creates a permanent difference for taxation purposes. This permanent difference results from indexation or a non-taxable capital profit included in the revaluation amount for an asset. When an asset is allocated to a pension member, Simple Fund will record the whole revaluation amount as a permanent difference. This ensures that no additional Provision for Deferred Income Tax (PDIT) is generated from assets allocated to pension members.

Note: If the fund has previously been recording tax effect accounting, you will need to manually review the opening balance of the Provision for Deferred Income Tax account prior to the member going into Pension Mode. Create Entries process and record a write back of PDIT to account 493 and 870 prior to Creating Entries. This was covered in Task 3.1.

CGT Indexation Method

Prior to 30 September 1999, Simple Fund calculated a permanent difference where the market value of an investment is greater than the indexed value of the investment. The amount included was the difference between the indexed value of the asset and the cost of the asset.

CGT 1/3 Discount Method

On the 30th September 1999, as a result of the changes to Capital Gains Tax Legislation, the calculation method changed. If an investment was purchased after this date, the permanent difference amount is now calculated using the lower of the frozen CGT Cost Base (the old method) or using the 2/3 Capital Profit method.

Simple Fund Tax Returns

Simple Fund will now process the transactions of the fund and calculate the amounts for the ATO Form F Return. This form is approved for lodgement to the ATO for both paper and electronic (ELS) format. Simple Fund pre fills the return with the exempt pension income and any other appropriate data. Most amounts are calculated by Simple Fund during the Create Entries process. Users can input any additional amounts in the appropriate field and click Save. For a full explanation of the data required, click $image\atoinstructions.gif$ in the tax return screen, to review the Form F Instructions. For assistance with electronic Lodgement, click $image\atoinstructions.gif$ the second icon to access the ATO's ELS Guide.

Simple Fund will calculate the taxable income of the fund taking into account the exempt pension income and other non-taxable items and post the appropriate tax expense entries. Simple fund provides a detailed reconciliation of exempt pension income in the Create Entries report, as well as providing a tax summary outlining the income tax expense journals posted. Account 485 will be debited with the Income Tax Expense, Account 870 with the amount of Deferred Income Tax and Account 850/001 with the amount of Income Tax Payable. The amounts posted to 850/001 Income Tax Payable and 850/002 Imputed Credits, 850/003 Foreign Credits and 850/005 TFN Credits are offset in the Financial Statements. No Income Tax Expense will be allocated to the pension member 50X accounts by the Create Entries process.

Before Creating Entries (where assets are not segregated/allocated to members)

The following steps should be followed before Creating Entries in a pension fund:

Write back any PDIT amounts in account 870 that relate to the pension fund. Switch off tax-effect accounting in Fund Details | Reporting (if applicable) (Task 3.1)
Ensure pension members balances have been transferred out of Preserved and Restricted accounts to Unrestricted accounts (Task 3.4)
Input the actuary percentage in the Members | Mode screen (Task 3.5)
Input the proportion of expenses that are non-deductible in Expenses Percentage in Fund Details | Reporting (Task 6.1).

Actuary Percentage – Adjustments for Actuary Certificate

Steps 1 to 3 were covered in Lesson 3. However once an actuary certificate has been obtained, it may be necessary to adjust the Actuary Percentage in the Members | Mode screen. For the purposes of this exercise, we will assume the actuary percentage does not need to be adjusted. The actuary percentages remain as follows:

John Jones Allocated Pension	37.99%
John Jones Market-linked Pension	44.73%
Total	82.72%

Learning tasks

Task 6.1 – Record non-deductible Expenses Percentage.

Input 82.72% as the percentage of expenses that are to be allocated as non-deductible due to the current segregated pension assets.

Task 6.2 - Creating Entries – Unsegregated Assets

Create Entries from 28/07/2004 to 30/06/2005 and review the Create Entries Report. The previous Create Entries from 01/07/2004 – 27/07/2004 does not need to be reversed.

Task 6.3 - Balancing Forward

Balance the BGL Training Fund forward to the next financial period.