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  • Requirements for claiming the tax exemption

    Actuarial certificate

    If you want to claim a tax exemption on the SMSF's income while paying a super income stream benefit, you may need an actuarial certificate. This will also help you to calculate the amount of ECPI you can claim.

    SMSFs using the unsegregated assets method will need an actuarial certificate for each year they claim ECPI, regardless of the type of super income stream benefit being paid.

    If all SMSF fund members are receiving a pension, and the combined account balances of these pensions is equal to the market value of the fund's total assets, all fund assets meet the 'segregated' requirement as their sole purpose is to pay super income stream benefits. These funds are commonly referred to as being '100% in pension phase'.

    In this situation, we accept that the SMSF is not required to identify individual assets as being dedicated to funding a super income stream benefit.

    For the 2017-18 income year onwards, an SMSF will be unable to use the segregated method to calculate ECPI if:

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

    These SMSF assets will not meet the requirement of being 'segregated', even if the SMSF is 100% in pension phase. Therefore, you may only use the unsegregated method to claim ECPI and must obtain an actuarial certificate.

    You will not need to obtain an actuarial certificate to claim ECPI if:

    • you want to claim the tax exemption using the segregated assets method, if available
    • at all times that pensions were payable during the income year, the SMSF only paid only the following pension types  
      • allocated pensions
      • market-linked pensions
      • account-based pensions.

    This applies to an SMSF even where it commences to pay an allocated, market-linked or account-based pension during the year, and was not claiming ECPI under either method before that.

    Note: if the market value of the assets supporting an income stream benefit exceeds the member account balance supporting the benefit, the excess amount won't be considered to be segregated current pension assets.

    If the SMSF pays other types of super income stream benefits and uses the segregated assets method to claim the tax exemption, you will need to obtain a certificate covering all super income stream benefits the SMSF pays. This includes allocated pensions, market-linked pensions and account-based pensions.

    You will need to obtain an actuarial certificate to claim the ECPI using the segregated assets method if any of the following apply:

    • Your SMSF paid any super income stream benefit other than an allocated pension, market-linked pension or an account-based pension.
    • The market value of a benefit that is an allocated pension, market-linked pension or account-based pension exceeds the account balance supporting the benefit.
    • Your SMSF is paying an allocated pension, market-linked pension or account-based pension in addition to other types of super income stream benefits. If this is the case you will need to obtain a certificate covering all super income stream benefits, including any allocated, market-linked or account-based pensions.

    SMSF Assets are segregated for part of an income year

    If the assets of your SMSF are segregated for only part of an income year and you wish to claim ECPI for the remaining period of the year in which the assets of your SMSF are unsegregated, you will be required to obtain an actuarial certificate for the period your fund's assets are unsegregated.

    Periods when 100% of an SMSFs assets are supporting pension liabilities

    In instances where all of an SMSF's assets are held 'solely' to meet super income stream benefit liabilities it has to pay, then 100% of the fund's assets are used to support pension liabilities and our position is that all of the fund's assets in these circumstances are classified as segregated current pension assets.

    This means that for any portion of any income year where an SMSF's assets are held solely to meet super income stream liability benefits (i.e. any period that the SMSF is in 100% pension phase) the SMSF trustee is required to calculate its ECPI for that portion of the income year using the segregated method. An actuarial certificate is not required to support the SMSF trustee's calculation of ECPI for this period when all of the fund's assets are classified as segregated current pension assets.

    For any portion of an income year that an SMSF is not in 100% pension phase, for example its members have a mix of pension phase and accumulation phase interests for part of the year, and the SMSF's assets are not segregated, the SMSF trustee will be required to use the proportionate method to determine its ECPI for that period. That is, the SMSF trustee will be required to obtain an actuarial certificate if they wish to claim ECPI in relation to income received by the fund during that part of the income year.

    The actuary will calculate the proportion of the fund’s assets that are supporting super income stream liabilities during that part of the year when the fund’s assets were not segregated. The SMSF trustee is then required to apply the proportion determined by the actuary to the income received by the fund during the relevant period as a component of the fund’s ECPI for the income year.

    Our compliance approach for the 2016-17 income year and prior

    We understand there will be instances where an approach or practice not consistent with our position has been applied by some SMSF trustees to calculate ECPI.

    In particular, we understand that in some cases a SMSF has been in 100% pension phase for part of an income, but actuarial certificates have been obtained by SMSF trustees on the basis that fund assets are unsegregated for the entire year and the actuarial percentage calculated by the actuary has been applied to the fund’s income for the entire income year.

    Considering the low risk this issue presents regarding prior income years, we do not intend to specifically review ECPI calculations in the 2016-17 income year (and prior) regarding calculations made on the basis of fund assets being unsegregated for the entire income year, despite the fund being 100% in pension phase for part of the year.

    This compliance approach does not affect our position regarding the operation of the law; that SMSF's assets in these instances are segregated for part of the 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.

    Also, SMSF trustees should know that for the purposes of claiming CGT relief, an SMSF in these circumstances will still be considered to have switched from the segregated method to the proportionate method if a member of a SMSF that is 100% in pension phase commuted an amount back to accumulation to comply with the transfer balance cap, which commenced on 1 July 2017.

    For the 2017-18 income years and onward, we expect SMSF trustees to calculate ECPI and obtain actuarial certificates in line with our position. That is, where a SMSF's assets are unsegregated for part of an income year, the SMSF trustee will be required to obtain an actuarial certificate pertaining to that part of the income year if they wish to claim an ECPI deduction for income received during that period.

      Last modified: 05 Sep 2017QC 21546