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  • Methods for calculating ECPI

    There are two methods for calculating the amount of ECPI an SMSF can claim:

    • segregated method
    • proportionate method.

    Generally the method used depends on whether an SMSF'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.

    An SMSF may be required to use one of the two calculation methods in some circumstances.

    See also:

    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, an SMSF doesn't set aside specific assets to support retirement-phase income streams.

    Instead, the SMSF determines 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 SMSF's total assessable income for the period to determine the amount that is ECPI.

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

    When an SMSF must use a particular ECPI calculation method

    Use the segregated method when a fund is 100% in retirement phase

    If all the interests in an SMSF are retirement-phase income streams (for example, there are no accumulation accounts), 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' and our position is that all the fund's assets in these circumstances are segregated current pension assets (provided they're not disregarded small fund assets).

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

    An SMSF may need to switch its method for calculating ECPI if it becomes 100% in retirement phase within an 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 a case like this, the SMSF 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 the proportionate method when a fund has disregarded small fund assets

    From the 2017–18 income year, an SMSF will need to use the proportionate method to calculate ECPI for all members for the entire income year if it has at least one retirement-phase income stream at any time of the year and:

    • a fund member has a total super balance over $1.6 million immediately before the start of the relevant income year
    • that member is receiving a retirement-phase income stream from any source including the SMSF or another super provider.

    The fund's assets are disregarded small fund assets, and won't be segregated current pension assets even if the fund is 100% in retirement phase.

    This change only limits an SMSF 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 use 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:

    It's important to note if an SMSF 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 SMSF 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.

      Last modified: 04 Oct 2019QC 21546