by Alex Polorotoff

There still seems to be some confusion around when actuarial certificates are required and whether the fund is using the segregated method or proportionate method. In this article, we hope to clearly explain this and provide an update on the expected draft legislation, related to the actuarial changes that are expected to apply from 1 July 2021.

For reference, when we discuss pensions in this article, we are referring to retirement-phase income streams (which excludes transition to retirement pensions).

There are two methods for calculating the amount of ECPI an SMSF can claim:

• Segregated method; and
• Proportionate method.

SEGREGATED METHOD

An SMSF is considered to be using the segregated method if the assets are supporting only pensions. An actuarial certificate won’t be required to claim ECPI if at all times during the year, the only pensions were:

• Allocated pensions;
• Market-linked pension; or
• Account based pension.

However, an SMSF using this method will need an actuarial certificate if it paid pensions other than the above. These are generally older style pensions that began prior to 20 September 2007.

PROPROTIONATE METHOD

SMSFs using this method will need an actuarial certificate if they wish to claim ECPI. This not only includes scenarios where there are both accumulation and pension balances, but also reserve accounts.

Segregated SMSFs who meet the criteria for disregarded small fund assets, which we discuss in detail below, will also be required to use the proportionate method, even where pension assets are sergregated.

WORKED EXAMPLES

Following are some worked exampled to assist with identifying when an actuarial certificate is required:

1. An SMSF is solely in accumulation phase for a part of the year and then moves the entire balance to pension. No actuarial certificate is required. No ECPI is claimed whilst the fund was in accumulation phase and 100% ECPI is claimed for the period it was paying the pension.
2. An SMSF has both accumulation and pension balances during the year however, has no net taxable income so there is no benefit to claiming ECPI. In this case, the cost of obtaining an actuarial certificate is higher than the benefit gained from claiming ECPI. As long as no ECPI is claimed in the Annual Return then no certificate is required.
3. An SMSF only has pensions but receives a rollover part-way through the year, leaving it in an accumulation account. A few months later it commences a pension from the existing accumulation account, once again transitioning to solely having pension accounts. An actuarial certificate won’t be required for the period the SMSF was solely in pension however, for the period the accumulation account was maintained, a certificate will be required to calculate ECPI.
4. An SMSF has both accumulation and pension balances at the start of the year. After a few months, a member meets a condition of release and commences a pension from the existing accumulation account. Further down the road, a member returns to work for a period of six months, receiving contributions during this time. When that member finishes work and decides to retire, the existing accumulation balance is used to start another pension. The SMSF is once again entirely in retirement phase.

So, in this example:

1. 1. the fund started the year using the proportionate method;
   2. then the segregated method (when it only had pension accounts);
   3. then converted back to proportionate method (when the member returned to work); and
   4. finally returned to using the segregated method (when the accumulation balance converted to pension).

An actuarial certificate is required for the periods where the proportionate method was used and that percentage will only apply to those periods. Where the segregated method applied, 100% ECPI is claimed.

DISREGARDED SMALL FUND ASSETS

This legislation was introduced with the superannuation reforms applying from 1 July 2017. An SMSF will have Disregarded Fund Assets if at 30 June of the previous financial year, a member had a total super balance over $1.6 million and is receiving a pension from either the SMSF or another fund.

If an SMSF is using the segregated method and meets this definition, then it must use the proportionate method to calculate ECPI. The SMSF however, can still use segregation for investment purposes.

EXPECTED CHANGES FROM 1 JULY 2021

Changes to requirements for calculating ECPI are expected to come in from 1 July 2021 however, draft legislation is yet to be released.

It was previously expected that where an SMSF used both the segregated and proportionate method during the year, the actuarial certificate would be used to calculate a single percentage to claim ECPI for the whole year, as was industry practice pre 1 July 2017.

However, following the budget announcement earlier this year, it was proposed to give SMSF trustees the choice over whether they choose the current method where the fund uses both the segregated and proportionate method, or revert back to the ‘old method’ pre 1 July 2017.

An interesting point will be how trustees choose which method to use and when that choice needs to be made. It would seem unlikely that the ATO would allow trustees to make their election at the end of the year, allowing them to choose the option that gives them the best tax outcome.