A common theme to the questions is that the relevant funds have generally had some form of segregation being applied prior to the contribution being received. If not for the contribution, it is likely that the segregated method of claiming Exempt Current Pension Income (ECPI) would be available to the fund.

Contribution reserving strategy

The name itself for this strategy is a misnomer, as the ATO have confirmed that setting aside contributions prior to allocating them to a member is not a reserve, per se. It is more akin to a having the amount in a holding, or suspense account.

The strategy is made possible due to the provisions of SIS regulation 7.08 that requires contributions made to an SMSF be allocated to a member, not later than 28 days after the end of the month in which the contribution is received. It is worth noting that this is unique to SMSFs, APRA regulated funds are required to allocate certain contributions no later than three business days after both the contribution and relevant information has been received by the fund trustee. Generally, these will be contributions made by an employer via SuperStream.

For contributions received by an SMSF in June, this will mean the trustees have until 28 July to allocate the amount to a member. The importance of the strategy is that the contribution is taxable (where applicable) in the year the fund receives it. Any potential deduction is also claimed in the year of payment. However, the amount will not count towards the member’s contribution cap until the year it is allocated to the member.

Claiming Exempt Current Pension Income

Where a superannuation fund is supporting retirement phase pension accounts, it is generally able to claim any income derived from the assets supporting those pension accounts as exempt from fund income tax. The claim for ECPI can be made using either the ‘segregated’ method (section 295-385 ITAA 1997) or the proportionate method (section 295-390 ITAA 1997). In some cases, both methods are used in the same income year.

An actuarial certificate will not be required where the segregated method of claiming ECPI is used. Consequently, there is no choice as to whether or not to claim ECPI where the segregated method applies. Although it is beyond the scope of this article to go into greater detail, it is acknowledged that Disregarded Small Fund Assets (DSFA) may prohibit a fund from using the segregated method. This does not stop a fund from segregating assets for investment, or member choice purposes.

Where the proportionate method is used to claim ECPI, a certificate must be obtained from an actuary before the date for lodgement of the fund’s return for the year. Unlike the segregated method, claiming ECPI under the proportionate method is a choice, as there is no legal requirement to obtain an actuarial certificate. However, where the relevant actuarial certificate is not obtained by the required time, the fund cannot claim ECPI under the proportionate method. This allows for times where it would not be worthwhile to claim ECPI where the proportionate method applies, for example, the fund may have available significant tax losses and/or the retirement phase pension commences late in the income year.

Is there an interaction between the two?

A contribution to a fund, whether it is allocated to a member or not, will become an asset of the fund. The more common type of contribution will be a deposit to the fund’s bank account, with in-specie transfer of assets another popular option.

Where the value of these contributions is not allocated to a member, they will generally be recorded as a liability to the fund, either in the liability section of the Statement of Financial Position or in the Member’s Equity section, but separate from the actual member’s interest.

When considering claiming ECPI under the segregated method, legislative reference is made to the assets of the fund, at a time, being invested or otherwise being dealt with for the sole purpose of enabling the fund to discharge all or part of its liabilities in respect of retirement phase income streams. Further, reference is made to the fact that if the market value of the assets set aside to support the retirement phase income streams exceeds the value of those benefits, they will not be segregated pension accounts.

Making a cash contribution to a fund’s bank account, that was previously segregated to retirement phase pension interests, without increasing the value of those interest (remember a contribution cannot be made to a pension account) would result in that asset (the bank account) no longer being a segregated current pension asset. Likewise, in-specie transfers are not going to increase the value of the pension interest either and the asset so transferred would also not be a segregated current pension asset.

Unless the trustees make a prospective, conscious decision to run sub-accounts for the bank account receiving the contribution and/or segregate specific assets to the pension accounts, the assets of the fund will no longer be segregated. How many trustees will take such actions when a short term, contribution reserving strategy is being implemented?

In most cases, one would expect that the majority of funds would no longer be seen as segregated from the time the contribution is received, and this would preclude them from claiming ECPI under section 295-385 (segregated method) from that point on. It may, however, be possible to claim the fund as segregated prior to that point. This leaves the option of using the proportionate method to claim ECPI from the time the contribution is received.

Where it can get interesting is how the proportion of any ECPI is calculated under this method. Unlike the segregated method, that makes reference to the assets of the fund, the proportionate method makes reference to the liabilities of the fund, as follows;

Average value of current pension liabilities divided by Average value of superannuation liabilities