From 1 July 2017 there are three major changes affecting funds paying retirement phase pensions and claiming a tax exemption on some or all of their investment income (exempt current pension income or ECPI). Will some of these create the need for a fund to have more than one actuarial certificate in a year?
The three major changes are:
- The tax exemption is no longer available for non retirement phase pensions (ie transition to retirement pensions where the member has not met a full condition of release);
- Some funds are no longer allowed to claim their exemption using the “segregated” method; and
- Some funds must claim their ECPI using the segregated method for part or all of the year.
We have previously explained which funds cannot be segregated in our blog Segregating in SMSFs beyond 1 July 2017. In a nutshell, if a fund cannot be segregated it will always need an actuarial certificate to claim any ECPI. Just one certificate will be required and it will cover the entire financial year, even if the fund had periods during the year when it was entirely providing retirement phase pensions.
This includes some weird and wonderful cases where actuarial certificates have never been obtained before – see our blog New and interesting scenarios where an actuarial certificate is required for ECPI.
But what about funds that can be segregated? What has changed for them?
The challenge for these funds is that if there is any period during the year when they are entirely in pension phase (providing retirement phase pensions only) they must claim their ECPI for that period using the segregated method. This is the case even where there are other periods during the year when they are not entirely providing retirement phase pensions.
Consider the following fund:
- 1 July 2017 – a mixture of pension and accumulation accounts
- 1 November 2017 – moves entirely to retirement phase pensions
- 1 March 2018 - receives a contribution which remains in accumulation phase
Assuming this fund is allowed to be classified as segregated, it will claim its ECPI as follows:
- 1 July 2017 – 31 October 2017 : actuarial certificate method
- 1 November 2017 – 28 February 2018 : segregated method
- 1 March 2018 – 30 June 2018 : actuarial certificate method
In other words, all investment income between 1 November 2017 and 28 February 2018 will be ECPI automatically (no actuarial certificate required).
The fund will need an actuarial certificate to claim any ECPI in either of the other two periods. (Although of course, if no income is actually received during either of those periods there is nothing to prevent the accountant choosing not to obtain an actuarial certificate and therefore claim no exemption for that time).
But how many certificates? One covering the entire year or two (one for each period)?
While there has been some confusion created about this recently, the law is quite clear – it is one certificate for the entire year and it should provide only one percentage. This is applied to all income other than income that was earned on segregated assets. This means it will effectively be applied to all investment income received before 1 November 2017 or after 28 February 2018.
Interestingly the same percentage will be applied to all relevant income (ie excluding the segregated period). This is despite the fact that the relative values of pension accounts might be very different in the first and second “mixed” periods. What if, for example:
- Only 40% of the fund was in pension phase for the first period; and
- 80% of the fund was in pension phase for the second?
A single percentage (let’s say 60%) would be applied to all the relevant earnings (any investment income before 1 November or after 28 February).
In fact, even if there had been no pensions at all during the first 4 months of the year, the actuarial percentage would be applied to earnings during that part of the year as well (and of course the percentage applied to the last four months of the year would be much lower than might be expected because it would have been dragged down by the fact that no pensions were provided at all in the first phase of the year).
(Technically if there are no pensions at all during the first part of the year the trustees could obtain a different type of actuarial certificate stating that the assets were segregated non pension accounts at that time. This is very unusual and we have ignored that possibility here.)
Importantly, no matter how many periods there are during the year, the actuary will only ever provide one certificate containing one percentage which is applied to all income received at a time when the fund is not segregated.
This is going to lead to some really weird results.