Over the past few years the ATO has indicated its intention to focus on the exempt current pension income (ECPI) deduction claimed in the self-managed superannuation fund (SMSF) annual return and this continues again in 2014. The ECPI deduction is the largest deduction claimed by SMSFs and therefore it is important to get the calculation correct to avoid scrutiny by the ATO.

The reporting of ECPI in the SMSF annual return for 2012/13 changed from previous years to gather more information about the claim of ECPI.

Section 10: exempt current pension income

This section of the SMSF annual return asks whether the fund intends to claim a tax exemption for current pension income in the 2013/14 financial year. If the fund paid a pension to any of its members during the financial year, and if the minimum pension standards were met for those pensions, then the fund will be eligible to claim an exemption from income tax at Section 10.

Ordinary income and statutory income that a complying SMSF earns from assets held to provide for superannuation income stream benefits can be exempt from income tax. However, any non-arm’s length income or assessable contributions are excluded.

Income that is exempt is referred to as ECPI. This exemption is claimed under the Income Tax Assessment Act 1997. The legislation sets out the two methods for working out the amount of ECPI you can claim:

• segregated assets method – Section 295.385
• unsegregated assets method – Section 295.390

Completing the tax return

1. If the SMSF paid an income stream to one or more members during the year, and the minimum pension standards were met on these pensions, print X in the ‘Yes’ box. Otherwise, print X in the No box.
   
   
2. If you selected ‘Yes’, then at item A enter the total amount of ECPI being claimed. Under the segregated method this will be the income earned on segregated pension assets during the 2012/13 year. Under the unsegregated method this will be the fund’s ordinary income multiplied by the tax exempt percentage provided by an actuary.
   
   
3. You must then print ‘X’ in the appropriate box (B or C) selecting the method used to calculate ECPI. B for the segregated assets method or C for the unsegregated assets method. If the SMSF is in full pension phase (with no defined benefit pensions) for the entire financial year, and there were no non-arm’s length income, then select the ‘segregated assets method’. The ATO have made it clear that where a SMSF is in full pension phase it considers all the fund’s assets to be segregated pension assets and hence the segregated method (Item B) should be used. The fund is not required to identify individual assets as being allocated to particular superannuation income stream benefits for this to be the case. In order to claim ECPI under the unsegregated method an actuarial certificate is required to certify the fund’s tax exemption. Print ‘X’ in the ‘Yes’ box at item D to indicate that an actuarial certificate has been obtained by the fund.
   
   
4. If the fund had any other assessable income then print ‘X’ in ‘Yes’ at item E. Funds that are not fully in pension phase, or have non-arm’s length income will need to select ‘Yes’. If the fund has no assessable income print X in ‘No’ at item E.

What if the fund has hybrid segregation?

An interesting question arises for funds which use hybrid or partial segregation. This partial segregation occurs where some of the funds’ assets use the segregated method and some use the unsegregated method. What will the trustee need to enter at items B and C?

We believe that in this instance it would be appropriate to select both options. The fund is claiming ECPI under the segregated assets methods for income earned on segregated current pension assets, and under the unsegregated method for income earned on pension assets that are part of a wider unsegregated asset pool. Note that an actuarial certificate will be required to certify the tax exempt proportion for the income earned on the unsegregated assets.

If you are unsure whether you require an actuarial certificate please contact Accurium on 1800 203 123 for further assistance.