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

Is a actuarial certificate

The significant superannuation reform package that came into force on 1 July 2017 also saw the ATO release updated guidance on how self-managed superannuation funds (SMSFs)  claim exempt current pension income (ECPI). These changes, which apply from the 2017-18 income year have made the question of whether an actuarial certificate is required more difficult to answer. 

How a fund must claim Exempt Current Pension Income (ECPI) in 2017-18 and future income years has changed from the 2016-17 and previous years.. 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 EPCI in the annual return. We explain below a few of the key changes.

Transition to retirement income streams (TRIS)

Previously for the purpose of ECPI income earned on TRIS 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 TRIS and ABPs for the entire income 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. 

TRIS can now either be in retirement or non-retirement phase. The income earned on a non-retirement phase TRIS will not be tax free, while income earned on a retirement phase TRIS will continue to be tax free.  A TRIS 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 TRIS 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 TRIS will again become tax free and included in the fund’s ECPI.

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

Deemed segregation

In prior income years the 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 is if it was fully in pension phase for an entire income 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 an income 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 TRIS, 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 income 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 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.

The 2019 Federal Budget included an announcement that may do away with the concept of deemed segregation, allowing trustees to return to the previous approach of only segregating by choice. The changes were supposed to come into effect from 1 July 2020, however, disruptions due to COVID-19 have meant we are yet to see draft legislation to enact these changes. We understand that the government is committed to the changes, but it now seems likely that they will be delayed.

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 income 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 income 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 income 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 an income 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.

It was announced in the 2019 Federal Budget that legislation would be brought forward to remove this anomaly. As with the segregation changes, we have yet to hear when this will take effect.

Not claiming unsegregated ECPI

In addition to these new considerations, there is still the question of whether the fund should choose to not obtain an actuarial certificate and not claim unsegregated ECPI. An actuarial certificate is only required for the fund to be able to claim unsegregated ECPI for the income year. This does mean that the choice can be made to not obtain an actuarial certificate for the income year and claim no unsegregated ECPI, with all unsegregated income being fully taxable. This is something a fund might think about if the cost of obtaining the actuarial certificate will outweigh the benefits to the fund.

While the fund is unable to claim unsegregated ECPI without the actuarial certificate it can still claim segregated ECPI. With the changes to deemed segregation the situation may now be more common where a fund will claim segregated exempt income but chooses to not get an actuarial certificate and treats any unsegregated income as taxable.

Conclusion

Changes to administration of SMSFs from the 2017-18 income 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.


Disclaimer

This information 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, legal advice or tax 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. The information is provided in good faith and derived from sources believed to be accurate and current at the date of publication. 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. We recommend that you seek appropriate professional advice before making any financial decisions.