• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

SuperGuide

Superannuation and retirement planning information

  • SuperGuide Premium
  • Account
  • Log In
  • SuperGuide Premium
  • Account
  • Log In
  • How super works
    • Super for beginners
    • Super rules
    • Employers guide to super
    • Super contributions
    • Super and tax
    • Accessing super
    • Super news
    • Women and super
    • Super tips and strategies
    • How-to guides
    • Super quizzes
    • Superannuation Q&As
    • Superannuation glossary
  • Super funds
    • Best performing super funds
    • Super fund rankings
    • Best performing pension funds
    • Pension fund rankings
    • Super fund average returns
    • Super investing strategies
    • Comparing super funds
    • Choosing a super fund
    • Choosing an investment option
    • Super fund fees
    • Insurance and super
    • Super fund profiles
  • SMSFs
    • SMSFs for beginners
    • SMSF administration
    • SMSF checklists
    • SMSF compliance
    • SMSF investing
    • SMSF pensions
    • SMSF strategies
    • SMSF Q&As
  • Plan your retirement
    • Retirement planning for beginners
    • When should I retire?
    • How long will I live?
    • How much super do I need?
    • Will I get the Age Pension?
    • How much will I spend in retirement?
    • Financial advice
    • Retiring overseas
    • Preparing for retirement
    • Retirement planning strategies
    • Retirement calculators and reckoners
  • In retirement
    • Income in retirement
    • Super lump sums
    • Super pensions
    • Age Pension
    • Working in retirement
    • Life in retirement
    • Senior concessions and services
    • Aged care
    • Estate planning
    • Super death benefits

Home / SMSFs / SMSF pensions

What SMSF trustees need to know about ECPI

March 1, 2020 by Penny Pryor Leave a Comment

Reading time: 4 minutes

On this page

  • The rules
  • Contributions and rollovers
  • Capital gains and capital losses
  • Case study
  • Bottom line

Self-managed superannuation funds offer members some useful advantages when it comes to paying pensions. One such benefit refers to the treatment of income earned on assets that are supporting a pension, called exempt current pension income or ECPI.

As income earned on assets in retirement phase is tax-free, ECPI can be used to offset other taxable income in the fund or to reduce the total tax liability of an SMSF. If there is only one member in an SMSF and that member is in retirement phase for the whole financial year, all income earned on assets will be tax-free, provided there is no non-arm’s length income (NALI).

The rules

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:


Advertisement
SuperGuide Premium is ad-free

Assets of a complying fund are segregated current pension assets if the assets are identified as supporting retirement-phase income streams and the sole purpose of these assets is to pay retirement-phase income streams.

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.

Compare super funds

Read more...

Advertisement

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.

As long as the fund actively segregates the assets, such as by holding the contribution or rollover in a sub-account or separate bank account (following Taxation Determination TD 2014/7) the fund can continue to use the segregated method.

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.

Advertisement

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.


Advertisement
Want to learn more about running an SMSF?

Become a SuperGuide Premium member and access expert guides for SMSFs, on topics such as costs, compliance, administration, investment, borrowing and pensions. Discover valuable super and retirement strategies, the most popular shares, managed funds and ETFs for SMSFs, the latest super rates and thresholds, contributions caps and more.

Includes more than 500 articles, how-to guides, checklists, tips, calculators, case studies, quizzes and a monthly newsletter.

Find out more


Learn more about SMSF pensions in the following SuperGuide articles:

Commuting an SMSF allocated pension

April 1, 2020

SMSFs: How to start a pension

March 23, 2020

Definitive guide to the $1.6 million transfer balance cap

January 30, 2020

Proportioning rule and super tax: What it is and why it matters

July 12, 2019

Starting a pension from your super

July 1, 2019

Total Superannuation Balance: When it applies and what is included

May 7, 2019

SMSFs: What are the lump sum withdrawal rules?

March 11, 2019

Related topics

SMSF pensions SMSFs

Related features

Case studies

IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

© Copyright SuperGuide 2009-21. Copyright for this article belongs to SuperGuide Pty Ltd, and cannot be reproduced without express and specific consent. Learn more

Primary Sidebar

How super works
Super for beginners
Super rules
Employers guide to super
Super contributions
Super and tax
Accessing super
Super news
Women and super
Super tips and strategies
How-to guides
Super quizzes
Superannuation Q&As
Superannuation glossary
Super funds
Best performing super funds
Super fund rankings
Best performing pension funds
Pension fund rankings
Super fund average returns
Super investing strategies
Comparing super funds
Choosing a super fund
Choosing an investment option
Super fund fees
Insurance and super
Super fund profiles
SMSFs
SMSFs for beginners
SMSF administration
SMSF checklists
SMSF compliance
SMSF investing
SMSF pensions
SMSF strategies
SMSF Q&As
Plan your retirement
Retirement planning for beginners
When should I retire?
How long will I live?
How much super do I need?
Will I get the Age Pension?
How much will I spend in retirement?
Financial advice
Retiring overseas
Preparing for retirement
Retirement planning strategies
Retirement calculators and reckoners
In retirement
Income in retirement
Super lump sums
Super pensions
Age Pension
Working in retirement
Life in retirement
Senior concessions and services
Aged care
Estate planning
Super death benefits
Advertisement
Compare super funds

Join SuperGuide Premium and give your retirement plans a boost.

Get access to independent expert commentary on the latest super, retirement and SMSF issues, including the top performing super and pension funds, how much super is enough, the latest super rates and thresholds and new super measures and strategies.

You’ll have access to more than 500 articles, how-to super guides, checklists, tips, calculators, reckoners and other tools, as well as a monthly newsletter.

Find out more

Footer

Important: Disclaimer

All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs.

You should consider whether any information on SuperGuide is appropriate to you before acting on it.

If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions.

Learn more

About SuperGuide

SuperGuide is Australia’s leading superannuation and retirement planning website. Learn more

Superguide Pty Ltd ATF Superguide Unit Trust as a Corporate Authorised Representative (CAR) is a Corporate Authorised Representative of Independent Financial Advisers Australia, AFSL 464629

  • Contact us
  • Advertise on SuperGuide
  • Careers

Before using this website

  • New to SuperGuide?
  • Terms and Conditions of Use
  • Financial Services Guide
  • Privacy Policy and Privacy Collection
  • Copyright Policy
  • Editorial Policy and Complaints
  • Disclaimer

  • SuperGuide Premium
  • Subscriber feedback
  • Sitemap