What SMSF trustees need to know about ECPI

If you are paying a pension from your SMSF you may be eligible to claim ECPI. That income stream must meet the ATO’s requirements to be considered a pension by the regulator. Those requirements are that a payment is made at least annually and that the pension meets the minimum pension requirements as per the below table.

Age	Minimum % annual withdrawal
Under 65	4%
65–74	5%
75–79	6%
80–84	7%
85–89	9%
90–94	11%
95 or more	14%

ECPI is claimed in an SMSF’s annual tax return.

How you calculate ECPI will depend on whether your assets are segregated or not. For segregated assets all income earned on assets supporting the pension will be considered ECPI.

The ATO uses the following definition for segregated assets:

Assets supporting the pension must be valued at market value, however, if the value of the assets supporting the pension is more than the sum of the account balances of the SMSF’s income streams, the ATO says those assets cannot be segregated current pension assets “to the extent they exceed the account balances”.

For non-segregated assets, the proportionate method of calculating ECPI must be used.

SMSF assets that need to use the proportionate method for ECPI are those where the assets for accumulation members and pension-phase members are mixed and there is no distinction discernible to members as to which assets belong to which phase.

In such cases an actuary is required to proportion ECPI for each phase and this will usually be the proportion of the SMSF’s total account balances that are retirement-phase income streams and averaged across the year. Funds that use the proportionate method to calculate ECPI are also required to obtain an actuarial certificate each year when claiming ECPI in their annual tax return.

Sometimes funds are required to use certain methods for calculating ECPI. For example, a fund that is completely in retirement phase is required to use the segregated method and may need to change the method used midway through a financial year if it was using the proportionate method to start with. This could happen if a member previously in accumulation phase joined the other member already in retirement phase midway through a year.

An SMSF is required to use the proportionate method if there are ‘disregarded small fund assets’. This occurs when an SMSF has at least one retirement-phase income stream and a fund member has a total super balance of more than $1.6 million immediately before the income year begins and that member is receiving a retirement-phase income stream from either the SMSF or any other source.

Contributions and rollovers

If an SMSF that was previously 100% in retirement phase receives a contribution or rollover it ceases to be considered 100% in retirement phase as the contribution or rollover is an accumulation interest.

But the ATO says that an SMSF doesn’t necessarily need to switch to the proportionate method in such cases.

The SMSF is only required to use the proportionate method if the SMSF assets are not segregated. Member account balances should be recorded when the rollover or contribution is made for the purposes of obtaining an actuarial certificate.

Capital gains and capital losses

If an SMSF has segregated current pension assets, then capital gains and capital losses incurred as a result of selling these pension assets needs to be ignored and a capital loss must not be offset against any other capital gain.

If an SMSF’s assets are unsegregated then an SMSF’s net capital loss can be carried forward until it can be offset against an assessable capital gain. An SMSF’s net capital gain is added to the SMSF’s assessable income for the relevant year and the actuary will calculate how much of the SMSF’s income is ECPI.

Case study

The following case study is based on ATO examples, more details of which can be found here.

AJ SMSF has two members – Angus and Jo. Jo has reached his preservation age and began drawing a pension from AJ SMSF of $36,000 this financial year while Angus is still in accumulation phase.

AJ SMSF invests in four shares, managed funds and other investments.

The four shares yielded $35,000 in dividends each during the financial year with franking credits of $15,000.

The fund’s other investments, including managed funds, yielded interest of $200, trust income of $20,000 with imputation credits of $2,000 on the managed funds, foreign income of $10,000 with a foreign tax credit of $500 and capital gains (all discount) of $4,000.

The assets are segregated such that Jo has the four shares and Angus has the remaining assets. The tax would be calculated as per the below table.

	Value
Net capital gain	$4,000
Gross interest	$200
Net foreign income	$10,000
Franked dividend amount	$140,000	From shares supporting the pension
Dividend franking credit	$60,000	From shares supporting the pension
Gross trust distributions	$20,000	From managed funds in accumulation interest
Gross income	$234,200	Sum of first six rows
Exempt current pension income (ECPI)	$200,000	Dividends plus imputation credits on shares supporting the pension
Total assessable/taxable income	$34,200	Gross income subtract ECPI
Tax on taxable income at 15%	$5130
Complying fund’s franking credits tax offset	$62,000
AJ SMSF’s total tax refund	$56,870	Complying fund’s franking credits tax offset minus tax on taxable income at 15%

Bottom line

It is very important for SMSFs with members about to go into retirement phase for the first time to understand how ECPI will need to be calculated well before the pension begins. While many SMSFs may choose to use a service provider to complete their annual returns, and therefore their ECPI calculations, some careful planning may help a fund reduce cost and confusion for members as they reach retirement.