From 1 July 2017 some funds providing retirement phase pensions are no longer allowed to be classified as segregated when it comes to claiming a tax exemption on some or all of their investment income (exempt current pension income or ECPI). We have explained who, how and why in our blog Segregating in SMSFs beyond 1 July 2017.
This does create some new scenarios where these funds will now need actuarial certificates to claim their ECPI.
This article provides some examples. Note that it only relates to funds that cannot be classified as segregated. The position for funds that can be classified as segregated is quite different – the exact opposite in fact.
Example 1 - Funds that are exclusively providing retirement phase pensions all year
These funds would normally have claimed all investment income as ECPI without an actuarial certificate. Whether the trustee realised it or not, they were only exempt from the actuarial certificate requirement because their ECPI was being claimed using the segregated method.
These funds will now need an actuarial certificate. And funnily enough it will give a percentage of 100%.
Tip: since it is only funds that have members with both retirement phase pensions and a total superannuation balance of more than $1.6m at the previous 30 June which cannot segregate, it may be difficult to imagine how Example 1 would actually occur in practice. Surely anyone with more than $1.6m cannot be entirely in retirement phase pensions? However, remember that this may be applicable for many funds from 1 July 2018 (their pension balances were below $1.6m at 30 June 2017 but higher at 30 June 2018). Also remember that total superannuation balance includes benefits in other funds – a member with a $1.5m retirement phase pension in their SMSF at 30 June 2017 but $0.3m in another fund at that date would rule their SMSF out of being allowed to segregate as early as 2017/18.
Example 2 - Funds that are entirely providing retirement phase pensions for most of the year
If little or no income is received when the fund has accumulation balances, accountants for these funds often chose not to obtain an actuarial certificate for the “unsegregated” period.
For example, a fund that had a mixture of pension and accumulation accounts on 1 July but cashed out the accumulation account entirely on 5 July and was 100% providing retirement phase pensions for the rest of the year. If the only investment income received in the first five days of the financial year was $100 bank interest, accountants would often simply pay tax on that interest and claim income beyond 5 July as ECPI. If they were not claiming any exemption on income earned while the fund was “pooled” (unsegregated) there was no need to obtain an actuarial certificate.
In the new world, if this fund is not allowed to segregate it will be required to obtain an actuarial certificate for the whole year to claim any ECPI. Depending on the amount of time the fund had a mixture of accumulation and pension accounts and the relative sizes of the two types of accounts, the actuarial percentage may be 100% or it may be less. Importantly, it does not matter how much income was received in that “mixed” period. A fund that received no income during that period may still find their actuarial percentage is only (say) 95% and this 95% must be applied to all income received throughout the year.
Example 3 – Funds that move from 100% accumulation phase to 100% pension phase during the year
In the past, many funds would just treat all investment income received after the pension(s) started as exempt from tax and pay tax on income received before that date. No actuarial certificate would have been required.
In the future, for funds that cannot be classified as segregated, an actuarial certificate will be obtained for the whole year and be applied to all income received during the year. If a major asset such as a property was sold after the pensions started in (say) December the capital gain would not be entirely tax exempt. It would be subject to the actuarial percentage that would relate to the whole year (including five months where there were no pensions at all).
Tip: again it may be difficult to see how this would actually happen since it is likely that a fund in this position would have no members with retirement phase pensions in their SMSF at the previous 30 June. Remember, however, that if any member had a retirement phase pension in another fund at the previous 30 June and also had a total superannuation balance of more than $1.6m at that time, the SMSF will be ineligible for the segregated method for ECPI.
These are just three examples where the new world will be profoundly different to the old. Time to re-set some longstanding paradigms for all of us.