Another year, another change in ECPI. To properly understand the 2022 ECPI (Exempt Current Pension Income) changes, we need to start with the changes that took place back in 2017.
From 1 July 2017 there were 3 changes to way ECPI is calculated in SMSF Actuarial Certificates:
1. Income relating to TRIS Pensions is no longer exempt
2. Actuaries are now required to separate the year into periods when assets are Segregated and Unsegregated. Only the ECPI relating to the Unsegregated periods appears on the Actuarial Certificate. Income earned during periods where assets are Segregated is 100% Exempt, you just won’t see it on an Actuarial Certificate
3. Assets in an SMSF where a member has both a Total Superannuation Balance of more than $1.6m and a Retirement Income Stream account in a superannuation fund at the prior 30 June, are called Disregarded Small Fund Assets (“DSFA”). If an SMSF has DSFA, it is not permitted to segregate assets for tax purposes.
Choice of ECPI Calculation Method
The first change introduced in 2022 is the ability to choose the ECPI calculation method. Let’s take an example where an SMSF has an opening balance of $100,000 in Account Based Pension and $100,000 in Accumulation. Then, on 1 January, the member starts a New Account Based Pension, so there is $200,000 in Account Based Pension for the second half of the year.
Prior to 2018, we would have calculated the ECPI as approximately 75% across the entire year.
From 2018 to 2021 we would have divided the year into 2 parts. The ECPI shown on the Actuarial Certificate for the first half of the year would have been 50%. For the second half of the year, the ECPI would have been 100% however this would not have appeared on the Actuarial Certificate.
From 2021/22 onwards, we are allowed to choose between these 2 methods.
Disregarded Small Fund Assets for a Pension Only Fund
One of the quirks introduced in 2017 was to treat all assets as being Unsegregated when an SMSF had Disregarded Small Fund Assets. A by-product of this was that Funds with only Pension Balances, with a member who has a balance of more than $1.6m, required an Actuarial Certificate even though it was easy to see that the ECPI would be 100%.
From the 2021/22 FY onwards, the assets in these Funds are treated as Unsegregated and therefore an Actuarial Certificate is no longer required.
This article provides a brief summary of the 2022 ECPI Changes. To understand this in more detail, we recommend you view our webinar recording.
THIS ARTICLE WAS CORRECT AT THE TIME OF WRITING. SMSF RULES CHANGE OVER TIME AND THE ARTICLE MAY BE LESS RELEVANT IN THE FUTURE.
Greg Einfeld has over 20 years’ experience in the Australian Superannuation and Financial Services industry. He has MEc and MBA degrees, is a licensed financial adviser, a qualified actuary, and specialises in Self Managed Super Funds (SMSF’s). He regularly presents on a variety of SMSF topics including investment, tax, estate planning, pensions, administration and strategies.