SMSF Actuarial Certificate

In many instances, if an SMSF has a retirement phase income stream, an actuarial certificate will be required if ECPI is to be claimed in the SMSF Annual Return.   

Deciding whether an actuarial certificate is required can be difficult and making the wrong decision can significantly increase the SMSF’s tax liability.   

To assist with deciding on whether an actuarial certificate is required for an SMSF, we have developed a simple and easy to follow ATO ECPI Flowchart. 

Understanding ECPI Calculation Methods for SMSFs

Which Method for Calculating ECPI Should the SMSF Use? 

There are currently two methods for calculating ECPI and an SMSF may be legally required to select a specific method, depending on the circumstances in the fund.   

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

• Segregated method  

• Proportionate method 

Where an SMSF meets both of the following criteria, you may choose which method you apply, to calculate ECPI: 

• The SMSF had some assets which were segregated current pension assets during that year 

• It has some assets supporting accumulation accounts (i.e. it is not 100% in retirement phase) 

Segregated Method 

An SMSF is considered to be using the segregated method if at all times during the year, all segregated assets are supporting retirement phase pension accounts. 

If an SMSF has segregated pension assets, any capital gains or losses should be ignored from the disposal of these assets. 

Where an SMSF has the option to choose between using the segregated or proportionate method to calculate ECPI, it may be beneficial to select the segregated method. This is especially true when members are in different stages of their superannuation journey. 

For example, a husband and wife are approaching retirement and would like to commence retirement phase pensions with the existing assets in the fund.  Their investment strategy is to utilise high-income producing assets to support their annual pension requirements.   

However, their son and daughter would also like to become members of the SMSF and rollover their existing balances. Since they are just starting to build their retirement savings, they focus on investments that grow in value instead of those that provide income. 

In this case, it may be better to allocate the high-income producing investments to the husband and wife’s pension accounts whilst allocating the capital growth assets to the son and daughter. 

If this approach was taken and the segregated method was used to calculate ECPI, the SMSF would not pay tax on the income produced by the assets segregated to the pension accounts.   

And the investments segregated to the son and daughter’s accumulation accounts would not pay tax on any unrealised gains. 

Proportionate 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. 

Net capital losses that arise are not included in the ECPI calculation, based on the actuarial calculation, and can be carried forward to offset future capital gains. 

The benefit of using this method, where a choice is available, may be in circumstances where: 

• Even if all members are entirely in the retirement phase, an actuarial certificate will be required if assets and earnings are greater than estimated liabilities at any stage during the year.
• Multiple members who maintain both accumulation and pension accounts are needed to purchase a large asset, such as business real property. 
• In this case, having members in accumulation phase and contributing to the SMSF may also assist with meeting ongoing costs of the SMSF, allowing members in retirement phase to maintain their pension accounts. 
• The Trustees do not wish to deal with the complexity of the segregated method and potential additional costs to remain compliant.  A simpler method for calculating ECPI may outweigh this additional expense.