Frequently Asked Questions

Peter May, our actuary has worked in financial services for over 30 years and qualified as an actuary in 1989. He has worked for Professional Financial Solutions since 2012 having previously working as a consultant actuary for Palmer Gould Evans, Buck Consultants and AMP. The services Peter provides to clients include actuarial certificates such as the section 295-390 certificates required by the current taxation act for funds with non-segregated pension assets. Peter was a member of the superannuation practice committee of the Institute of Actuaries of Australia for over 8 years until 2014. This committee, amongst other things, drafted actuarial professional standards and set guidance for actuaries in respect of superannuation practice.

EPCI is ordinary and statutory income earned on assets supporting a superannuation income stream (Pension) benefit. Assessable contributions and non-arm’s length income are excluded from ECPI calculations. The assessable income of the SMSF can be reduced by the amount of ECPI.

ECPI is determined under Section 295.385 and 390 of the Income Tax Assessment Act 1997 and is calculated each year.

When a SMSF commences a pension, ordinary income earned on assets supporting the pension is exempt from Income tax. This income is commonly referred to as Exempt Current Pension Income (ECPI). To claim this exemption, generally two methods can be used. 

Segregated assets method: Where assets specifically supporting a pension are set aside, like investments in Term deposits or shares equivalent to balance in pension accounts. These assets do not mix with other assets of the fund. 

Un-segregated assets method: Where assets representing accumulation balances and supporting pensions are pooled together and cannot be separately identified. 

Funds using the segregated assets method do not need an actuarial certificate. But if the fund is using the un- segregated method, an actuarial certificate is required for claiming ECPI which certifies the proportion of exempt income.

Examples of situations when an actuarial certificate is needed:

  • Some members of the fund are in accumulation phase and some in pension phase.
  • A member is drawing Transition to retirement Income stream where he is drawing pension and the fund is also receiving contributions for the member.
  • If one member started the year with an accumulation account but during the year he converts his accumulation balance into a pension account.

Examples of situations when an actuarial certificate will not be needed:

  • Where all the members are in accumulation phase for whole of the year.
  • Where all the members are in pension phase for whole of the year.
  • Where the fund is using the segregated assets method

Case scenarios with un-segregated assets

Case Scenarios Actuary certificate
Michael is drawing a pension, Mary is still in accumulation phase Yes
Assets are unsegregated
Michael (single member) is drawing a Transition to Retirement income stream and his employer is contributing to the fund Yes
Some assets are in Accumulation
Michael and Mary are both drawing pensions and are not contributing No
Fund is segregated
On 1 July, Michael and Mary commence drawing pensions from the fund – there are no new contributions to the fund No
Fund is segregated
Michael is drawing a pension; he is the only member of the fund. He then makes a $450,000 contribution into the SMSF.- He leaves the money in accumulation Yes
Some assets are in Accumulation
Michael is drawing a pension; he is the only member of the fund. He then makes a $450,000 contribution into the SMSF - He commences a pension immediately No
Fund is segregated
Michael was drawing a pension and died on 1st Jan. The money is paid from the SMSF as a lump sum to his estate after all assets are sold on 15th May. Yes
On death the account moves to Accumulation phase

Yes, if you have purchased an actuarial certificate for this fund for last year from us we give you an option to auto fill some of the data like details of SMSF, its members and closing balances of last year which are auto picked as opening balances of current year. Even if you are applying for actuarial certificate for the first time and this SMSF has been formed on our website, you still can select the fund from drop down list and fund details and member details will get auto filled.

Exempt percentage is calculated with the weighted balances so it is important that the transactions be entered on correct dates as changing the dates will affect the calculation of exempt percentage. However if the transactions are very small & relatively evenly spread out in a period you can combine them and enter as one transaction around the middle of that period. However for large transactions we strongly recommend that the transactions be entered individually to get a correct exempt percentage.

The figures you are required to enter in this summary operating statement are balancing figures and for reconciliation purpose only. These will not affect the calculation of exempt percentage. So if the classification of income / expenses does not match with the software used by you, just reconcile the figure manually by leaving/adjusting the figures as per operating statement produced by your software.

You can click on ‘Pay by other method’. The application will be saved to ‘Finished unpaid documents’ in your document manager and you will get an email containing the provisional exempt percentage. When you are satisfied with the figure, you can choose to make the payment and submit the application.

After you have completed and submitted the application or the certificate has been issued, you may realise that the submitted data contains some error. If so, making an amendment is easy. Just phone our support team and we will put your data back in edit mode for you to make the necessary changes. After you have finished amending the data, you need to click on ‘Pay by other method’ on the last page and that’s it on your part. After the amended application has been submitted, our actuary will go through the amended data and a replacement certificate will be issued. Amendments are free of charge.

Pensions must comply with the limitations and requirements of sub regulation 1.06 (9A) of the SIS Regulations and other provision of superannuation law. Some of these requirements include;

-payment of a minimum amount is to be made at least annually (unless the pension commences in June)

-the member may, in receipt of this pension, withdraw as much as they wish above the minimum, including the entire amount; and

-the pension may be transferred only on the death of the member to a dependant as prescribed in superannuation law; and

-the member must not use the capital value or income of the pension to borrow any funds from a third party; and

before a commutation of the pension in a financial year, the trustee as per Reg. 1.07D (1) (d), must pay pension, in the financial year in which the commutation takes place, at least the minimum amount prescribed by the sub regulation.

If the minimum pension standards are not met, the ATO will deem that the pension had ceased to exist on 1 July. The pension interest will be treated as part of the fund’s accumulation interest and any benefit payment will be treated as a superannuation lump sum. Moreover, the fund will lose its entitlement to claim exempt current pension income (ECPI) for the financial year.

If you commute this pension account during the financial year - then you have to close this pension account and mix the balance of the fund to an accumulation account (existing or set up a new account) of the member on the same day. This is called an internal rollover and allowed only if the fund's trust deed allows it. Pension account cannot accept new money, neither can they a pay a lump sum or roll out or transfer out any money to the member or to another fund or to another member within the fund unless there is a marriage breakdown and there is a court order. In any case, a pension account has to be switched to accumulation account first. However a member can withdraw 100% of the pension account as a pension (income stream).

A superannuation lump sum is an ad-hoc cash payment from a super fund. Regular withdrawals are known as income streams although there lump sums may be withdrawn more than once during the financial year.

Provided a condition of release is met, then a member can access his super benefits held in accumulation phase, as a lump sum. Moreover, a member can also partially or fully commute their pension to make a lump sum payout.

The taxation of lump sum benefits depends on the age of the member; for example, if a member is under the age of 60, the low rate cap limit (up to $195000 for the 2016-17 year) of your taxable component is usually tax-free, except for certain benefits paid to public servants.

If a member is over age 60, superannuation lump sums are usually tax-free (expect certain benefits paid to public servants).

Prior to 1 July 2007, Life insurance and total permanent disability (TPD) premiums paid by a SMSF was fully deductible. From 1 July 2007, the ‘Simpler Super’ reforms which came into existence changed the definition of TPD. This means that if the TPD definition matches that of the Tax Act, it is fully deductible. However, if the definition is broader than the tax act, the premiums will only be partly deductible.

Life insurance premiums will nevertheless be fully deductible-irrespective whether it is paid from an accumulation or pension account.

Income from segregated assets will be 100% tax free on assets supporting a pension and 100% taxable on assets supporting an accumulation account. If the assets are un-segregated, a tax free percentage will need to be specified by an actuarial certificate.

Expenses incurred in earning ECPI (pension assets) cannot be claimed as a deduction in the tax return. Similarly, expenses incurred solely for assessable income such as supervisory levy or insurance premiums are fully deductible.

Expenses which relate to both accumulation and pension assets can claim a deduction depending on what proportion of the income of the fund relates to assessable income. The percentage as specified by an actuarial certificate is one such method; another accepted method is the method as specified in ATO Tax Ruling TR 93/17.