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Does an SMSF require an actuarial certificate to claim ECPI? | Accurium

The superannuation legislation reform and related updated guidance from the ATO has increased the complexity of SMSF administration. These changes which apply from the 2017-18 financial year have also made the question of whether an actuarial certificate is required to claim exempt current pension income (ECPI) for a financial year more difficult to answer. 

How a fund must claim ECPI in 2017-18 and future financial years is changing from previous years, and it will be important for SMSF trustees to be on across these changes so they get it right. In particular a trustee now must consider the retirement phase status of Transition to retirement (TTR) income streams, and whether the fund is eligible, or indeed required, to use the segregated method for ECPI.

Accurium has developed a flow chart to help you identify whether an actuarial certificate is required by the fund in order to claim ECPI in the annual return. We explain below a few of the key changes.

Transition to retirement income streams

Previously for the purpose of ECPI income earned on TTR income streams and Account based pensions (ABP) were treated the same way, with assets supporting these income streams both contributing to the tax free pension liabilities of the fund. This also meant that if a fund only had TTR income streams and ABPs for the entire financial year, and no accumulation interest, then an actuarial certificate was not required and the fund would be 100% tax exempt with all eligible income claimed as ECPI. However, this may no longer be the case. 

TTR income streams can now either be in retirement or non-retirement phase. The income earned on a non-retirement phase TTR income stream will not be tax free, while income earned on a retirement phase TTR income stream will continue to be tax free.  A TTR income stream will be a non-retirement phase income stream if the member has not yet met a relevant condition of release and reported this to the trustee. The TTR income will convert from non-retirement phase to retirement phase automatically once the member turns 65 or when the member informs the trustees that they have met a condition of release. From that time the income on assets supporting the TTR income stream will again become tax free and included in the fund’s ECPI.

Where a fund has a TTR in retirement phase for at least part of a financial year, and the pension standards were met, the fund may be eligible to claim ECPI in that financial year.
 
Deemed segregation

In prior income years industry understood asset segregation to refer to an investment decision made by the trustee, often to segregate a particular asset to a member’s income stream, and this elected asset segregation was not a common occurrence. The other time a fund was seen as segregated was if the fund was fully in pension phase for an entire financial year. A fund solely in pension phase would claim all eligible income as ECPI using the segregated method and would not require an actuarial certificate. Where a fund did have an accumulation interest in a year the fund would generally apply the unsegregated method and so obtain an actuarial certificate to claim ECPI. 

The ATO have stated a view on segregation applying from 1 July 2017 which changes this.

If a fund is solely in retirement phase for any period of a financial year then the segregated method must be used for that period and all eligible income in that period will be claimed as ECPI using the segregated method. If the fund has periods of the year where there is an accumulation interest or non-retirement phase TTR income stream, and also a retirement phase income stream, then the fund must obtain an actuarial certificate and use the unsegregated method to claim ECPI on income earned in those periods. A period where a fund is solely in accumulation phase will generally form part of the unsegregated periods for a fund. 

This means a number of funds which previously would have used the unsegregated method over an entire financial year will be required to use both the segregated and unsegregated method to claim ECPI. A special case occurs if the fund only has accumulation interests during the unsegregated periods e.g. a fund moves from solely in accumulation phase to solely in retirement phase. In this scenario the fund would claim ECPI using the segregated method for the period solely in retirement phase, and then as the unsegregated period is solely in accumulation there would be no ECPI to claim on unsegregated income because there are no pension liabilities and no actuarial certificate would be required.

As a general rule:
ECPI   = income earned on segregated periods   +   income earned in all unsegregated periods   x   actuarial tax exempt percentage
 
If a trustee decides not to claim ECPI on unsegregated periods, or only has accumulation assets in those periods, then the actuarial tax exempt percentage in the above formula is 0.
 
Under the deemed segregation rules an actuarial certificate will only be required if in the unsegregated periods of a year (and there could be more than one if a fund is moving in and out of solely being in retirement phase) the fund has a retirement phase interest. The actuarial certificate will include the asset values and transactions of the fund during the unsegregated periods, and exclude the segregated assets and transactions. The tax exempt percentage provided by the actuary will apply to all income earned across all of the unsegregated periods. Income earned in segregated periods will not require an actuarial certificate as income will be claimed as ECPI using the segregated method.
 
Disregarded small fund assets
 
To further complicate the new view stated above there is one scenario where the fund must ignore the deemed segregation requirements above and simply use the unsegregated method to claim ECPI on all fund income; this is when the fund has disregarded small fund assets.
 
This disregarded small fund assets legislation was introduced with the superannuation reforms and applies from the 2017-18 financial year. With a limit on the amount which can be transferred into retirement phase there was a thought that some trustees may attempt to circumnavigate the new rules and obtain an advantageous tax outcome by using segregation. The rules around disregarded small fund assets were introduced to stop this by requiring those funds who meet the definition to use the unsegregated method for tax purposes.
 
An SMSF will have disregarded small fund assets if at 30 June of the previous financial year a member had more than $1.6million in superannuation (across all funds and accounts) and also a retirement phase account in any fund. Then in the current financial year the SMSF has a member in retirement phase at any time. 
If an SMSF meets this definition the fund must use the unsegregated method to claim ECPI. This applies to both deemed segregation and any assets elected to be segregated. While not able to use segregation for tax purposes the fund could still segregate for investment purposes, i.e. electing in the fund’s investment strategy to allocate assets as belonging to certain members so that the income from those assets is allocated to that member’s account, instead of allocating income based on a proportional basis.
 
One outcome to be aware of is that due to the disregarded small fund assets rules it is possible to have a fund which is solely in retirement phase for a financial year still require an actuarial certificate in order to claim ECPI. The actuarial certificate would state an actuarial tax exempt percentage of 100% but the fund must obtain that actuarial certificate to claim ECPI due to the requirement to use the unsegregated method.
 
Conclusion
 
Changes to administration of SMSFs from the 2017-18 financial year has increased the complexity of claiming ECPI. A trustee now has additional documentation and reporting requirements, and may be required to keep track of several accounting periods in a year in order to accurately claim ECPI. If you are still unsure as to whether you require an actuarial certificate please give us a call on 1800 203 123 or view our flowchart.

 

Tags: Actuarial certificates

The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances.  While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.