From 1 July 2017, SMSFs are required to adopt the unsegregated method when calculating exempt current pension income where the fund is paying a retirement phase income stream, and a member has a total superannuation balance of more than $1.6 million and is receiving a retirement phase income stream from any fund.
Quick recap of segregated versus unsegregated method
The Tax Act provides two methods for SMSF’s when calculating the amount of income that is exempt from tax as it supports retirement phase income stream(s)2:
- segregated assets method, and
- unsegregated assets method.
Under the segregated method, specific assets of the fund are allocated to retirement phase account(s) or accumulation account(s). Under this method, income and capital gains derived from investments supporting retirement phase account(s) are tax exempt and income and capital gains derived from accumulation account(s) are taxable.
In contrast, under the unsegregated method, investments are pooled so that no particular asset is dedicated to either retirement phase or accumulation phase. In this case, the SMSF is required to pay tax proportionally based on an exempt current pension income (ECPI) percentage determined by an actuary. The ECPI is based on a weighted average balance of the fund’s current pension liabilities and non-pension liabilities throughout the year.
Either method has its pros and cons, however one of the main advantages of the segregated method is that it can allow an SMSF to completely disregard income (including capital gains) on any asset(s) that have been segregated to support retirement phase income stream(s).
Current Requirement
SMSFs1 are excluded from using the segregated method if, for an income year:
- At any time during the year, there is at least one superannuation interest in the fund that is in the retirement phase; and
- All of the following apply:
- A person has a “total superannuation balance” (TSB) exceeding $1.6M just before the start of the year
- The same person is the retirement phase recipient of a superannuation income stream just before the start of the year (whether from the fund or another provider); and
- The same person has a superannuation interest in the fund at any time during the year.
A member’s TSB includes the sum of their accumulation and retirement phase interests and, certain in-transit rollovers in all of their funds.
SMSF Trustees need to be aware of the following traps:
- failing to obtain actuarial certificate if the pension is unsegregated (a segregated pension does not require an actuarial certificate)
- assuming SMSF is able to apply the segregated method as it has assets of less than $1.6m (the total superannuation balance counts towards the $1.6m ie, superannuation held in other funds for the member)
- assuming future investment returns will not count towards the total balance of $1.6m (the requirement is based on a yearly assessment of the total superannuation balance).
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