Methods for calculating ECPI

There are two methods for calculating the amount of ECPI a fund can claim:

• segregated method
• proportionate method.

The method used depends on whether a fund's assets are 'segregated', meaning there are specific assets supporting retirement-phase income streams which are clearly held separate from any other assets the fund holds in accumulation phase.

Segregated method

When using the segregated method to calculate ECPI, all income from 'segregated current pension assets' is ECPI.

Assets of a complying fund are segregated current pension assets if the assets are identified as supporting retirement-phase income streams and the sole purpose of these assets is to pay retirement-phase income streams. Capital gains and losses are disregarded if a capital gains tax event occurs in relation to a segregated current pension asset.

Usually, the value of the assets supporting retirement-phase income streams will equal the value of those income streams. However, if the market value of the assets supporting retirement-phase income streams exceeds the sum of the account balances of those income streams, the assets can't be segregated current pension assets to the extent they exceed the account balances.

For some retirement-phase income streams that began before 20 September 2007, the assets supporting these income streams can only be segregated current pension assets if the fund obtains an actuarial certificate. The actuarial certificate verifies that the assets and expected earnings are sufficient to pay, in part or full, the income stream's liabilities as they fall due.

Proportionate method

When using the proportionate method to calculate ECPI, a fund doesn't set aside specific assets to support retirement-phase income streams.

Instead, the fund calculates the 'exempt proportion' of income based on the proportion of the fund's total liabilities that are current pension liabilities. Generally, this will be the proportion of the fund's total account balances that are retirement- phase income streams. This exempt proportion is averaged across the period of the year the fund used the proportionate method. It's determined by an actuary who provides an actuarial certificate.

The exempt proportion is then applied to the fund's total assessable income for the period to determine the amount that is ECPI.

A fund can't use the proportionate method to calculate ECPI during periods when fund assets are segregated current pension assets.

What are disregarded small fund assets

From the 2017–18 income year onwards, you will need to consider if your fund holds disregarded small fund assets as this may affect how you calculate ECPI.

A fund is deemed to have disregarded small fund assets when:

• the fund is paying at least one retirement phase income stream during the income year
• a fund member has a total super balance over $1.6 million immediately before the start of the relevant income year and,
• that member is receiving a retirement-phase income stream from any source including the small fund or another super provider, and.
• after 1 July 2021, the fund is NOT in 100% retirement phase at all times of the income year.

In these circumstances, the fund's assets are considered to be disregarded small fund assets and won't be segregated current pension assets.

NOTE: From the 2021–22 income year, if a fund is in 100% retirement phase at all times of the year, the disregarded small assets rule does not apply, and the fund's assets are segregated current pension assets.

What is '100% in retirement phase'

If all the interests in a fund are retirement-phase income streams (that is, there are no accumulation accounts or transition to retirement income streams being paid), it's considered that all the fund's assets are held 'solely' to support retirement-phase income streams. This is called being '100% in retirement phase'.

Which method should a small fund use

A fund may be required by law to use a particular calculation method in some circumstances. Where there is no required method, the trustees can decide which ECPI method is appropriate for their fund.

Follow the steps below in conjunction with the ECPI method checklist to determine the correct method for your fund.

Use the segregated method when the fund is 100% in retirement phase for the entire income year

From the 2021–22 income year, if a fund is in 100% retirement phase at all times of the year, the disregarded small assets rule does not apply, and the fund's assets are segregated current pension assets. The fund is required to use the segregated method to calculate ECPI for the entire year.

For the 2017–18 to 2020–21 income years, if a small fund is in 100% retirement phase at all times of the year but meets the disregarded small fund assets criteria it must use the proportionate method to calculate ECPI. See:

• Use the proportionate method when a fund does not have segregated current pension assets.

Use the segregated method when the fund is 100% in retirement phase at any point in an income year

This section is applicable only for the 2017–18 to 2020–21 income years inclusive.

For any portion of any income year where a fund is in 100% retirement phase and doesn't have disregarded small fund assets, ECPI is calculated using the segregated method.

A fund may need to switch its method for calculating ECPI if it becomes 100% in retirement phase within an applicable income year it has used the proportionate method.

This may happen if one member is receiving a retirement-phase income stream and another who has been in accumulation phase starts a retirement-phase income stream part way through the income year.

In this case, the fund will claim ECPI using the proportionate method for the first part of the income year. For the second part, when the fund is 100% in retirement phase, it will need to use the segregated method.

Use of the proportionate method when the fund is 100% in retirement phase at any point in an income year

This section is applicable for the 2021–22 and future income years.

For any portion of any income year where a fund is in 100% retirement phase and doesn't have disregarded small fund assets, the fund may choose to use only the proportionate method to calculate ECPI for the entire income year.

If the fund does not make a choice, they will be in deemed segregation and must use the segregated method to calculate ECPI for the period they are in 100% retirement phase.

Note: This choice is not a formal election and does not have to be submitted to the ATO. However, it is expected that trustees will keep a record of any choice they make and the details of the calculation they use.

Use the proportionate method when the fund does not have segregated current pension assets

From the 2017–18 income year, a fund must use the proportionate method to calculate ECPI for all members for the entire income year when they:

• hold disregarded small fund assets or
• have no segregated current pension assets

Reminder: From the 2021–22 income year, if a fund is in 100% retirement phase at all times of the year, the disregarded small assets rule does not apply, and the fund must use the segregated method to calculate ECPI for the entire year.

This change only limits a fund to using the proportionate method for the purposes of calculating ECPI. It doesn't limit a fund from segregating its assets to accommodate member investment choices, nor does it reduce the amount of ECPI a fund can claim. It just means the amount is calculated using the proportionate method.

When you can choose the ECPI calculation method

The fund may choose to use either the segregated method or the proportionate method to calculate ECPI for the income year when:

• A fund is paying a retirement-phase income stream
• the fund isn't 100% in retirement phase (for example, if some assets are supporting accumulation interests); and
• the fund doesn't have disregarded small fund assets.

It's important to note if a fund which is 100% in retirement phase receives a contribution or rollover, it ceases to be 100% in retirement phase as the contribution or rollover will be in an accumulation interest. However, the fund doesn't automatically need to switch to the proportionate method.

The segregated method allows a fund to segregate assets to support retirement- phase income streams and segregate other assets to support other interests such as accumulation accounts.

As long as the fund actively segregates the assets, such as by holding the contribution or rollover in a sub-account or separate bank account (following Taxation Determination TD 2014/7) the fund can continue to use the segregated method.

The fund is only required to use the proportionate method if it doesn't segregate its assets. If it doesn't segregate them, the member account balances at the time of the switch should be recorded for the purpose of obtaining an actuarial certificate covering the period the proportionate method is used.

Actuarial certificate requirements

A fund may need an actuarial certificate to claim ECPI in the fund's annual return. The actuarial certificate is used to calculate the amount of ECPI which can be claimed.

Proportionate method

Funds using the proportionate method will need an actuarial certificate for each year they claim ECPI, regardless of the type of retirement-phase income stream being paid.

For the 2017–18 to 2020–21 income years, funds must use the proportionate method if they have disregarded small fund assets, (even if the fund is in 100% in retirement phase) and obtain an actuarial certificate that certifies the proportion of exempt income.

Segregated method

A fund using the segregated method won't need an actuarial certificate to claim ECPI if at all times during the income year the only retirement-phase income streams paid were:

• allocated pensions
• market-linked pensions
• account-based pensions.

This applies even where one of the income streams is begun part way through an income year. It also applies if the fund hasn't previously claimed ECPI under the proportionate method or the segregated method.

A fund using the segregated method will need an actuarial certificate to claim ECPI if it paid any retirement-phase income streams other than those above. Generally, these are older style income streams started before 20 September 2007. The fund will need to obtain an actuarial certificate covering all the retirement-phase income streams it pays.

Combination of methods used in an income year

For any period or periods of an income year a fund isn't 100% in retirement phase, and the fund's assets aren't actively segregated, the proportionate method must be used. The fund will need an actuarial certificate for that income year.

An actuary will calculate the exempt proportion for the period or periods of the income year that the fund's assets weren't segregated. The exempt proportion the actuary calculates can be applied to the income earned by the fund during this period or periods to make up part of the fund's total ECPI for the income year.

Only one actuarial certificate is required for the period or periods the proportionate method is used, even if a fund changes methods multiple times in an income year. An actuarial certificate isn't required for the period or periods of the income year the segregated method is used.

Our compliance approach for the 2016–17 and prior income years

We understand there have been instances where an approach or practice not consistent with our position may have been applied by some funds to calculate ECPI.

In some cases a fund that's 100% in retirement phase for part of an income year may have obtained an actuarial certificate using the proportionate method for the entire year, with the exempt proportion calculated by the actuary applied to a fund's income for the full income year.

Considering the low risk this issue presents regarding prior income years, we don't intend to specifically review ECPI calculations in the 2016–17 income year (and prior) which were made using the proportionate method for the entire income year, despite the fund being 100% in retirement phase for part of the year.

This compliance approach doesn't affect our position regarding the operation of the law: that fund assets in these instances are segregated for part of an income year. We will maintain this position if formally requested through the relevant advice and guidance channels we provide even if advice or guidance relates to the 2016–17 income year and prior.

For the purposes of claiming CGT relief, a fund will still be considered to have switched from the segregated method to the proportionate method where the fund ceased being 100% in retirement phase and the fund didn't actively use the segregated method.

From the 2017–18 income year, we expect funds to calculate ECPI and obtain actuarial certificates in line with our position. That is, where a fund uses the proportionate method for part of an income year an actuarial certificate is required to claim ECPI for that period.

SAFs should now return to the Fund Income Tax Return Instructions to complete the labels in the Fund Income Tax Return.

Completing labels in the SMSF annual return

The following scenarios are provided to assist you to complete the relevant labels in the SMSF annual return.

The examples below are based on the following background information:

• the SMSF has a range of investments, mainly Australian shares and managed funds
  • the portfolio is regularly revised to ensure the fund isn't overweight in any particular share or fund, due to uneven price movement on the ASX – this results in some capital gains and capital losses, and there are capital gain distributions from the managed funds themselves
   
• the SMSF has two members and, as at the start of the financial year, ownership of the assets was 50:50
• the SMSF received $35,000 in dividends, with franking credits of $15,000, from each of the four companies invested in, for a total of $200,000
• the SMSF also earned interest of $200; ordinary trust income of $20,000, with imputation credits of $2,000 from their managed funds; foreign income of $10,000, with a foreign tax credit of $500; and capital gains, all discount, of $4,000
• the total income of the fund was thus $234,200
• the expenses are negligible and can be ignored
• the tax payable, prima facie, is $35,130.

The following additional assumptions are made in relation to these examples:

• the fund has all necessary actuarial certificates where required; for example, where the proportionate method is used
  • these certificates show a 50% split of income (if the percentage shown on the certificate was different, the calculations in the examples would need to be adjusted to reflect the percentage shown on the certificate)
   
• there was no non-arm's length income
• there were no contributions
• the pensions met all the requirements under the Superannuation Industry (Supervision) Act 1993External Link.

Examples 1 to 4 below demonstrate the calculation of taxable income or loss and the amount due or refundable where only some of the assets of an SMSF are held to support retirement-phase income streams.