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 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.