An SMSF using the proportionate method to claim ECPI will do so under Section 295-390 of ITAA 1997. This section sets out the methodology for the calculation of the exempt income proportion stated in the actuarial certificate.
The exempt income proportion is calculated as:
average value of current pension liabilities / average value of superannuation liabilities
These average values are specified as the average value for the ‘income year’. As such an actuarial certificate applies for an income year. It would be contrary to the legislation to issue an actuarial certificate for part of a financial year.
What income does the actuarial certificate apply to?
The exempt income proportion in an actuarial certificate will apply to all fund income in the relevant year except for non-arm’s length income, assessable contributions, or income on segregated assets.
If the fund has assets elected as segregated or has periods of deemed segregation then this does not mean the fund needs multiple actuarial certificates for each period where assets were not segregated. The actuarial calculation will exclude any segregated pension assets and the exempt income proportion will not apply to income earned on those segregated assets. Income on segregated assets is exempt under Section 295.385 and income earned in all of the periods where assets were not segregated will have the exempt income proportion shown in the actuarial certificate apply.
Similarly if a fund has a period where it is solely in accumulation phase, income in those periods would generally not be segregated and would have the actuarial exempt income proportion apply. The only time this would not be the case is if the fund trustee has documented to have segregated non-current assets which actually requires a separate actuarial certificate under Section 295.395 and is not common in an SMSF.
For more information on segregation click here.
If a fund is winding up we can issue a certificate prior to the end of the income year as after the date of the windup it is known that there will be no further transactions to impact the actuarial calculation.
Other times you might think you need a certificate but you don’t…
An actuarial certificate is not required when starting an income stream during the financial year. When calculating interim accounts to commence an income stream part-way through the year some software platforms request a tax calculation at that point, however this is not asking for the actuarial certificate. The actuarial certificate cannot be obtained until the end of the financial year and the exempt income proportion will apply to all fund income that is not on segregated assets both before and after any pension commencements.
The desire for a part year exempt income proportion might be generated by a desire to associate a large realised capital gain with solely retirement phase liabilities and hence have no tax liability for the gain. In this case, it may be worthwhile to plan ahead and consider whether a segregated asset strategy may be appropriate as a capital gain on segregated pension assets is disregarded as 100% tax exempt. You can read more about segregated asset strategies on capital gains here.
Some care is needed when segregating an asset in order to realise a gain tax free. For example if the asset is segregated to a retirement phase income stream just before the capital gain is realised tax free it could raise in the ATO’s mind the issue of aggressive tax planning.