ATO provides updated guidance on the process for claiming exempt current pension income
Since our last update, the ATO has provided updated guidance on the process for claiming exempt current pension income (ECPI). The changes in the ATO’s view results in SMSFs having greater flexibility and potentially reduced administrative costs.
What is exempt current pension income (ECPI)?
ECPI is income (including capital gains) that a complying SMSF earns from assets that are held to support the payment of pensions. As the name suggests, the income from these assets is exempt from income tax.
What methods are available for claiming ECPI?
There are two methods that can be used when claiming ECPI:
1. The segregated assets method; and
2. The unsegregated assets method
What is the segregated assets method?
An SMSF has segregated assets if it has certain assets that have been set aside specifically for the sole purpose of supporting the payment of pensions and the income from these assets can be specifically identified.
What is the unsegregated assets method?
If the assets of the SMSF are not specifically set aside for the sole purpose of supporting the payment of pensions (for example if the assets are supporting both pension and accumulation accounts at the same time), the SMSF must determine the amount of ECPI using the unsegregated assets method. When using the unsegregated assets method an SMSF needs to obtain an actuarial certificate that certifies the proportion of the income that is exempt.
What has changed in the ATO’s guidance?
There are two important changes in the ATO’s guidance:
1. SMSFs are no longer obliged to obtain an actuarial certificate and claim ECPI where it is not in the SMSF members’ best interests to do so. For example, where the cost of obtaining an actuarial certificate outweighs the tax saving. This would be particularly relevant for SMSFs with tax losses from prior years that are available.
2. An SMSF that has segregated assets is no longer required to obtain an actuarial certificate to claim ECPI even when pensions commenced or ceased during the year. For example, an SMSF where all members were in accumulation mode between July and December and all members were in pension mode between January and June would meet the definition of having segregated assets. As long as the income earned during the period January to June (when in pension mode) can be identified the SMSF is not required to obtain an actuarial certificate to claim ECPI.
If you have any questions about which method your SMSF should be using to claim ECPI and whether your SMSF requires an actuarial certificate, please do not hesitate to contact our office.