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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.

    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 the fund is 100% in retirement phase for the entire income year

    If all the interests in an SMSF are retirement-phase income streams (that is, 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'. Our position is that all the fund's assets in these circumstances are segregated current pension assets.

    For the 2017–18 to 2020–21 income years, you will need to consider if your fund holds disregarded small fund assets. If it does, you must use the proportionate method to calculate ECPI. See:

    • Use the proportionate method when a fund has disregarded small fund 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 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 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 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 the fund has disregarded small fund assets

    From the 2017–18 income year, an SMSF must use the proportionate method to calculate ECPI for all members for the entire income year if:

    • the fund has at least one retirement-phase income stream at any time of the 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 fund (not necessarily the SMSF).

    In these circumstances, the fund's assets are considered to be disregarded small fund assets, and won't be segregated current pension assets. These funds must use the proportionate method.

    Note: From the 2021–22 income year, if an SMSF 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.

    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 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:

    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.

    Actuarial certificate requirements

    An SMSF 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

    SMSF's 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, SMSFs 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

    An SMSF 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 an SMSF 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 an SMSF 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 SMSFs to calculate ECPI.

    In particular, we understand that in some cases an SMSF 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 SMSF 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 SMSFs to calculate ECPI and obtain actuarial certificates in line with our position. That is, where an SMSF uses the proportionate method for part of an income year an actuarial certificate is required to claim ECPI for that period.

      Last modified: 14 Sep 2021QC 21546