Overview

From 1 July 2017, there are a number of key changes that will affect how exempt current pension income (ECPI) is calculated and applied and whether an actuarial certificate is required by the fund in order to claim ECPI.

What has changed?

1. Transition-to-Retirement Income Streams (TRIS) will no longer receive tax exemption on earnings

From 1 July 2017, SMSFs can only claim ECPI where the current pension liabilities relate to the payment of retirement phase income streams.

This means SMSFs will have to pay tax on the earnings from assets supporting a TRIS where the recipient is under 65 and has not notified the SMSF they have met a condition of release with a nil cashing restriction (retirement, terminal medical condition or permanent incapacity).

2. The eligibility to use segregated method

For the 2017-18 income year onward, SMSFs can no longer use the segregated method to calculate ECPI where at any time during 2017–18 the SMSF had:

• A member with total superannuation balance over $1.6 million immediately before the start of the relevant income year
• That member is receiving an income stream from any source including the SMSF or another super provider.

These SMSF assets are defined as disregarded small fund assets and will not meet the requirement of being 'segregated', even if the SMSF is 100% in pension phase. In this case, the fund may only use the unsegregated method to claim ECPI and must obtain an actuarial certificate.

If the member has any external superannuation interests outside of Class, it is very important to update the external balance information in Class. This information along with the balances in Class will determine if the fund is eligible to apply the segregated method in whole or part of the financial year.

3. New actuarial certificate approach if assets are segregated for part of the financial year

The actuarial certificate now covers only periods where there are unsegregated assets in the fund. For an SMSF that is eligible to use the segregated method in a given financial year, if at any stage during that year there are periods where the assets are solely supporting retirement income streams then those periods are 'deemed' to be segregated.

Earnings received during the deemed segregated period will be fully exempted. For income received outside of the deemed segregated periods, the unsegregated method will be applied to calculate ECPI - assuming the fund hasn't specifically segregated any current pension assets. The actuarial percentage is calculated based on the periods that are not deemed segregated periods and will apply only to income received during the unsegregated periods.

We have summarised the changes of the industry practice as well as from the system's perspective in the table below

	FY 2017 and prior approach	From FY 2018 onwards
Industry Practice	ECPI is determined using unsegregated method only One actuarial certificate percentage applies for the entire financial year	ECPI is determined using both segregated and unsegregated methods Capital gains or losses derived in the period when it is deemed segregated are completely disregarded One actuarial certificate percentage applies for the period when the fund is unsegregated
Fund Policy	Generally only one fund policy is required from 1 July Two fund policies are only allowed when a fund is converted from full accumulation (0%) to full pension phase (100%) or vice versa	Only one fund policy from 1 July Multiple fund policies is not required when the fund is converted from full accumulation (0%) to full retirement phase (100%) or vice versa. The system automatically detects when the fund is in 100% retirement phase and applies the pension exemption percentage accordingly
Period Update	The 30 June period update is required to have the correct actuarial percentage incorporated and will apply the actuarial percentage to the entire financial year	Period update algorithm has been improved to warn users about boundary condition changes (i.e segregated to unsegregated or vice versa) and/or a conversion of TRIS to retirement phase. Additional data related to both the date and balances will also be included in the actuarial payload when an actuarial certificate is requested
Actuarial Integration	No changes to existing actuarial certificate processes	New actuarial payload and certificate process applies from 1 July 2017
ECPI	ECPI = (All assessable Income - assessable contribution - non-arm's length income) x actuarial exemption %	ECPI = ECPI from segregated periods + ECPI from unsegregated periods ECPI from segregated periods = Income derived from the segregated asset supporting retirement phase pension interests (capital gains will be disregarded), excluding assessable contributions and non-arm's length income. ECPI from unsegregated periods = (All assessable Income - assessable contribution - non-arm's length income) x actuarial exemption %
Capital Gain	Capital gains are included and form part of ECPI	Only capital gains derived in unsegregated period are included.
Pension Exemption Fund Expense %	Incorporating the old ECPI calculation	Incorporating the new ECPI calculation
SMSF Annual Return	Unsegregated asset method	Both segregated and unsegregated assets methods will be selected

Deemed Segregation – For an SMSF that is eligible to use the segregated method in a given financial year, if at any stage during that year there are periods where the assets are solely supporting retirement income streams then those periods are ‘deemed’ to be segregated.

Deemed Unsegregated – For an SMSF there are periods where it is not in "deemed segregated" during the financial year. This normally implies the fund was either in full accumulation phase or mixed mode where the assets are supporting both accumulation or retirement phase interests.

Worked Example

Case Study Fact:

You are the administrator of Mance Retirement Fund. All the transactions are processed up to 30 June 2018 and you are trying to finalise the fund. Assuming the fund is eligible to use the segregated method.

Tom (DOB: 1/1/1953) & Susan (DOB: 1/3/1953) are the only two members of the fund and each of them held a TRIS account as at 1 July 2017. During the 2017/18 financial year, both members have reached age 65 which has converted their TRISs into retirement phase. There are income and expense incurred throughout the period with the actuarial percentage to be 90% for 2017/18 financial year. The fund has switched from unsegregated method to segregated method to calculate ECPI on 1 March 2018.

The fund status throughout the period is summarised in the table below:

Period	Fund Status	Approach from 1 July 2017	Approach prior to 1 July 2017
01/07/2017  -  31/12/2017	100% accumulation	The fund is required to calculate the ECPI on the basis of: Unsegregated method for the unsegregated periods where a single actuarial certificate (with a single actuarial pension exemption percentage) will be issued to apply against the earnings generated during those periods, i.e. from 01/07/2017 - 28/02/2018	The fund can use segregated method to calculate ECPI for the entire period provided no other accumulation interests was received. The fund can also choose to apply unsegregated method to claim ECPI and an actuarial certificate would be obtained. The actuarial percentage will cover the entire financial year as if the fund was unsegregated for the entire period.
01/01/2018 - 28/02/2018	Mixed with accumulation and retirement income streams
01/03/2018 - 30/06/2018	100% retirement income streams	Segregated method when the assets were solely supporting retirement pension liabilities (assumed eligibility criteria has been met).

Step 1: Review exception report to identify if any action is required prior to the day the switch of ECPI method boundary conditions or the TRIS conversion happened.

Step 2: Process the period updates in sequence with the earliest date identified above

In the period update processing screen, the Period End Date and the Period Update Description will be pre-filled automatically as the following:

• A day before Tom's 65th birthday
• A day before Susan's 65th birthday - this has also changed the ECPI method for the fund from unsegregated method to deemed segregation from 1 March 2018

Finally, run the 30 June 2018 final period update.

 

To verify the new TRIS and ECPI approach, we are going to split the income and expense incurred for the three periods, calculate the ECPI for each period then compare the numbers against the Statement of Taxable Income report generated from Class.

Income Expenses Detailed Breakdown

Detailed income and expense breakdown

Comment

• For Period 1 and 2, unsegregated method will be applied. The actuarial percentage of 90% will be applied against the income received (excluding realised notional deferred gains) in those periods to compute the ECPI. The total ECPI for the two period is calculated as: ($3934 - $300) * 90% + ($7533 - $300) * 90% = $9780.30
• For Period 3, segregated method will be applied and all the income (except for realised capital gains and notional deferred gains) derived from this period, will form 100% of the ECPI for this period. Realised gains derived from this period will be completely disregarded. The total ECPI for this period is calculated as: ($9833 - $1333 - $300) = $8200
• Realised notional deferred gain will not be further reduced by actuarial certificate% and the full amount will attract 15% tax
• Fund expense % in this case is calculated by applying the formula:
  
  Exempt Income / (Gross Income - Realised Notional Deferred Gains) = ($3270.6 + $6509.7 + $8200) / ($19,967 - $300*3) = 94.3006%
  
  Unlike the actuarial percentage which will only apply against the period where the fund is not in 100% retirement phase, fund expense % will be applied against the fund level operating expense across the three period to compute the deductible and non-deductible portion of the fund expenses.

In this example, the fund is eligible to use the segregated method as none of the members have total super balance greater than $1.6 million and in receipt of retirement phase pensions as at 30 June 2017, however, say if Tom's total super balance is greater than $1.6 million and is in receipt of retirement phase pensions as at 30 June 2017, the fund will not be eligible to use the segregated method to calculate the ECPI for 2017/18 financial year.
An actuarial certificate is required to be obtained for the entire period even if the assets are solely supporting the retirement pension liabilities for part of whole of the period. The actuarial percentage will be applied to the entire financial year, similar to the approach prior to 1 July 2017.

Reference:

• INCOME TAX ASSESSMENT ACT 1997 - SECT 295.387