Self Managed Super Fund – ECPI Certificates
We provide quick and accurate Exempt Current Pension Income (‘ECPI’) certificates. We can guide you on whether a certificate is needed and will assist you in completing an application.
If any SMSF member has a Defined Benefit Pension, then an ECPI certificate is always needed. In addition, an extra investigation is required on the ability of the SMSF to pay the Defined Benefit Pension, noting that pension payments may be required to an advanced age.
When is a ECPI certificate not required?
A SMSF is not required to source an SMSF ECPI certificate when:
- The fund’s members are all in the accumulation phase all year;
- The fund’s members are all in Account Based Pensions all year; or
- The trustees have elected to segregate assets to support the Account Based Pensions And… No member has a Total Superannuation Balance in excess of $1.6m (meaning there are no “Disregarded Small Fund Assets”).
SMSF – Defined Benefit Certificates
Self Managed Super Fund Defined Benefit certificates show the ability of an SMSF to pay a defined benefit pension, noting that pension payments may be required to an advanced age.
The investigation provided by Actuarial Support is suitable for SMSF compliance requirements and the Services Australia asset test for exempt lifetime income streams. It includes the ECPI certificate.
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Self Managed Super Funds – Guidance & Insights
Account Based Pensions are funded from accumulated superannuation savings. The account balance changes with pension payments, other withdrawals and earnings credited.
Account Based Pensions provide no guarantee of an income stream for life. A minimum pension must be paid each year. Investment earnings are generally tax free.
Older forms of Account Based Pension are Allocated Pensions, Market-Linked Pensions and Term Allocated Pensions. These are generally equivalent to current Account Based Pensions, although Market Linked Pensions and Term Allocated Pensions have additional rules on minimum and maximum payments. They are all referred to as Account Based Pensions in the rest of the guidance and insights, and all have identical access to ECPI
A pre-retirement Transition to Retirement Income Stream (‘TRIS’) becomes a post-retirement TRIS once the member has reached 65 or advised the trustee that they have met a condition of release (such as: retirement, permanent incapacity, or a terminal medical condition). A post-retirement TRIS is generally equivalent to an Account Based Pension and has identical access to ECPI. It is referred to as an Account Based Pension in the rest of the FAQ guidance.
Defined Benefit Pensions are not Account Based Pensions.
Defined benefit pensions pay regular benefits for a member’s life (and sometimes a reversionary benefit also) or pay for a nominated term. Payments are indexed as per the governing rules of the super fund. Earnings on assets backing Defined Benefit Pensions are generally tax free.
No new Defined Benefit Pensions have been allowed to be created from a SMSF since 2005.
Where a SMSF has a Defined Benefit Pension, actuarial certificates are required annually to cover:
- Whether the assets backing the Defined Benefit Pension are likely to be adequate to meet the future pension liabilities. A similar worded requirement is whether the assets backing the Defined Benefit Pension have a high probability (greater than 70 percent) to be adequate to meet the value of future pension liabilities.
- The percentage of the fund’s income that is exempt from tax (ECPI).
These certificates serve three purposes:
- Regulatory Compliance: Super fund regulations (Superannuation Industry (Supervision) Regulation 1994, regulation 9.30) requires an actuarial valuation to be performed within 12 months of the valuation date.
- ATO: A SMSF with defined benefit pensions must arrange for actuarial certificates after the end of the tax year,
but before the Fund’s tax return is submitted. - Assets Test Exemption: For your defined benefit pension to be treated as fully or partially assets test exempt by Services Australia, Services Australia requires that a copy of the actuarial certificate to be provided to them by 21 January.
The certificate service provided by Actuarial Support meets all these purposes.
The earnings on assets backing retirement accounts in a SMSF are tax free. These earnings are referred to under tax law as Exempt Current Pension Income (‘ECPI’). The earnings on assets that back accumulation accounts and SMSF reserves are taxed at 15%. If a SMSF has Non-Arm’s Length Income, a tax rate of 45% applies.
Each year an SMSF must submit an Annual Return to the Australian Taxation Office. The Return includes a declaration of assessable income, including any claim for ECPI.
To claim ECPI, all of a SMSF’s assets must be valued at current market value. The SMSF must also meet the minimum pension standards, such as:
• The SMSF has paid the minimum pension in that year.
• The capital supporting the pension can’t be increased using contributions or rollover amounts once the pension has started.
• You can’t use the capital value of the pension or the income from it as security for borrowing.
• Minimum pension payment requirements must be met before any full or partial commutation of a pension.
• The pension must be paid from an account held in the member’s name.
• If a member dies, the pension can only be transferred to a dependent beneficiary of that member.
Segregated current pension assets are assets solely supporting retirement phase income streams such as Account Based Pensions and Defined Benefit Pensions.
Deemed Segregation
If your SMSF is solely paying Account Based Pensions, then the fund’s assets are regarded as segregated current pension assets.
Elected Segregation
Elected segregation is an election for tax purposes. This occurs where a fund elects which assets support retirement phase income streams. There are a number of tax rules to follow on segregation. The main concepts are:
1. Assets need to be completely separate. This means you can’t segregate parts of an asset.
2. The segregation of assets needs to be documented.
3. Segregation must be justifiable based on fund and member considerations. The segregation should not solely be for a tax advantage.
4. Investment strategies are at the discretion of the trustees. The trustee must consider how any segregation of assets impacts member risk profiles.
Example of asset segregation: the fund commences a pension part way through the year, obtains a valuation of the assets at the date the pension commences and immediately segregates the pension assets.
A fund is deemed to have disregarded small fund assets when:
- On 30 June, just before the start of the financial year, the SMSF had at least one member:
- With a Total Super Balance over $1.6 million across all their superannuation interests (not just within the SMSF).
- Was receiving a retirement phase income stream from any of their superannuation interests (not just from the SMSF).
- The same member had a superannuation interest in the SMSF at some point in the financial year.
- The SMSF had an Account Based Pension or Defined Benefit Pension at any time during the financial year, with any member.
- The SMSF had an accumulation account or Defined Benefit Pension at any time during the financial year, with any member. Alternatively, the SMSF held a reserve at any point in the financial year.
The $1.6m limit is not indexed.
There are 2 methods for calculating the amount of ECPI a fund can claim, they are the:
Segregated method
When using the segregated method, the fund’s exempt current pension income is the ordinary and statutory income derived from the funds segregated current pension assets.
Proportionate method
When using the proportionate method to calculate ECPI, an Actuary calculates the exempt proportion of income based on the proportion of the fund’s total liabilities that are retirement phase income stream liabilities.
If a fund has Defined Benefit Pensions, only the proportionate method can be used. The fund will require additional defined benefit certificates related to funding the pension payments noting they may continue to an advanced age – see “FAQ – What are Defined Benefit Pensions?”
For funds where retirement phase income streams are Account Based Pensions, the eligibility to claim ECPI is shown in the table below.
| Conditions | ECPI Rules | Actuarial Certificate Required | |||
| Accumulation / Retirement Members | Disregarded Small Fund Assets | Trustee maintained segregated assets for retirement phase income stream liabilities | ECPI Eligible | ECPI Methodology | |
| All members are in accumulation or transition to retirement (non-retirement) phase all year. | No | N/A | No | ||
| All members are in the retirement phase income streams for the whole year. | Yes | Segregated method | No | ||
| Members are in a mixture of accumulation and retirement phase income streams during the year. | Yes | Yes | Proportionate method | Yes | |
| No | Yes | Yes | Choice of method | Yes, if elect Proportionate | |
| No | Yes | Proportionate method | Yes | ||
ECPI eligibility can change throughout the year. For example, an SMSF may have solely retirement phase income streams at the start of the year, then receive additional contributions creating accumulation interests. Such a fund could:
- Deem periods solely in pension to be segregated AND use the proportionate method for periods when there are accumulation and pensions assets;
- Deem all periods to be segregated if assets are maintained that meet the elected segregation rules; OR
- Use the proportionate method for the whole year.
When a combination of ECPI calculation methods is used, the fund needs an actuarial certificate for that income year.
- An actuary calculates the exempt proportion for the period or periods of the income year that the fund’s assets weren’t segregated. The exempt proportion can be applied to the income earned by the fund during these periods.
- Only one actuarial certificate is required for the period or periods the proportionate method is used, even if a fund changes methods multiple times in an income year.
- An actuarial certificate isn’t required for the period or periods of the income year the segregated method is used.
The tax deductibility of expenses varies based on the type of expense:
- Expenses that are not eligible for a deduction include expenses of a capital nature, private or domestic nature.
- Fully deductible expenses include actuarial certificate fees, supervisory levy, death premiums and disability premiums.
- For the remaining expenses, the portion of expenses not incurred to derive ECPI is deductible. This portion needs to be determined on a fair and reasonable basis.
Tax Ruling 93/17 describes two methods that may be considered fair and reasonable depending on the expense.
- Use the proportion of fund liabilities on average over the income year that are supporting non-retirement phase assets producing assessable income. This will be the same as (1 – actuarial exempt income proportion) where the fund has no segregated pension assets. Our ECPI certificates provide this value to assist trustees with expense deductions.
- Use the ratio of assessable income to total income.