In this article we discuss the changes and implications to segregated pension assets and actuarial certificates from 2017/18 year including some ways you may be able reduce the administrative impact these changes may have on your workload.

Key points

• Significant impact to Exempt Pension Income Calculation (ECPI) from 2017/18 year.
• Increased reporting and administration requirements.
• Additional importance of pension minutes and documentation to ensure compliance.

• Funds that change to, or from 100% Pension during the year. For example:
  • 100% accumulation fund converts to 100% pension
  • Mixed mode fund (pension and accumulation) converts to 100% Pension
  • 100% Pension fund converts to mixed mode
    • eg. a member receives a contribution during year
    • Members over the 1.6M cap commuting part of pension

Common practice has been to use the unsegregated method to determine exempt current pension income (ECPI) for all funds where for any part of the year there were pension and accumulation assets. The ATO has advised that this is no longer acceptable in some cases from 2017/18 onwards. 

The ATO view
If, for any part of a year, all SMSF fund members are receiving a pension, (commonly referred to as being ‘100% in pension phase’) the ATO’s position is that all of the fund’s assets are classified as segregated current pension assets and the trustees must use the segregated method to calculate ECPI for that period.

For any portion of an income year that an SMSF is not in 100% pension phase, for example its members have a mix of pension phase and accumulation phase interests for part of the year, and the SMSF’s assets are not segregated, the SMSF trustee will be required to use the proportionate method to determine its ECPI for that period. That is, the SMSF trustee will be required to obtain an actuarial certificate if they wish to claim ECPI in relation to income received by the fund during that part of the income year.

The SMSF trustee is then required to apply the proportion determined by the actuary to the income received by the fund during the relevant period as a component of the fund’s ECPI for the income year.

If the fund is 100% in pension phase for the whole year, then it is simple – all income is exempt and no actuarial certificate is required.

But what if a fund changes during a year? This can create a real complication:

• you may need to change the software settings and elect assets to be segregated.
• You may need to do a balance calculation to establish member balances at the conversion date.
• You may then need to determine the income earned up to the pension commencement in order to then calculate the exempt income.
• In some cases you may require an actuarial certificate for the period when the fund was in mixed mode.
• The timing of any income (eg CGT events) then becomes an important consideration as well.

Consider a fund with 2 members in mixed mode: one in pension and one accumulation. On 1 April the accumulation member also converts to pension making the fund 100% pension. To calculate the ECPI you would need to do an interim balance calculation at the date of conversion (1 April), get an actuarial certificate in respect of the income earned in the first 9 months then use the segregated method for ECPI for the last 3 months.

Another common example may be the case where a fund is in 100% pension phase but one member does some part time work and receives a contribution into the fund, putting the fund into mixed mode. If the accumulation account is not then segregated as well then the trustee will be required to use the proportionate method and obtain an actuarial certificate to determine its ECPI for that period in which there is a small accumulation account and segregated method for the remainder.

For the purposes of claiming CGT relief, an SMSF will still be considered to have switched from the segregated method to the proportionate method if a member of an SMSF that is 100% in pension phase commuted an amount back to accumulation to comply with the balance transfer cap on July 1 2017.

The determination as to whether assets are segregated or unsegregated must generally be made at the start of the period. Funds which are 100% in pension phase during the year should minute their intention to segregate any assets related to accumulation (eg additional future contributions) to ensure the fund does not revert to an unsegregated approach.

Trustees and accountants need to be aware of the implications of making changes during the year. In some cases, there may be some ways to reduce the administrative impact should this suit the circumstances. These include:

• Making changes to the pensions as at 1 July so that any calculations are for the full year and can be based on member balances at that date.
• avoid adding contributions to a fund with 100% pension so that the fund doesn’t have a combination of 100% pension and mixed mode.
• consider maintaining a small balance in accumulation for the remainder of the year so that the fund is in mixed mode all year rather than part mixed part 100%.
• Ensure all pension decisions are properly minuted at the time.

For any further information please contact Gerard Hannan on 1800 700 666 or email gerard.hannan@smsfengine.com.au.

General Advice Warning: Information provided in this article is general in nature only and does not constitute personal advice.