An SMSF may be able to claim an exemption for the income earned on retirement phase income stream assets, called exempt current pension income (ECPI). When calculating the amount of income that is exempt from income tax, non-arm’s length income and assessable contributions are excluded from the calculation.

The ECPI exemption can be claimed provided certain conditions are met, including when:

• the SMSF has started paying a retirement phase income stream
• all the SMSF’s assets are valued at current market value
• the SMSF has paid the minimum annual payment for any pension paid in the year the SMSF is claiming ECPI
• if required; an actuarial certificate has been obtained before lodging the SMSF annual return.

There are 2 methods for calculating the amount of ECPI a fund can claim:

• segregated method, and
• proportionate method.

The method used depends on whether a fund's assets are 'segregated', meaning there are specific assets supporting retirement-phase income streams which are clearly held separate from any other assets the fund holds in accumulation phase.

You may need an actuarial certificate to calculate the amount of exempt current pension income (ECPI) in your fund's annual return. Whether you need an actuarial certificate depends on the method used to calculate ECPI.

If you use the proportionate method – you’ll need an actuarial certificate for each year you claim ECPI, regardless of the type of retirement-phase income stream being paid.

If you use the segregated method – you won't need an actuarial certificate to claim ECPI if at all times during the income year the only retirement-phase income streams paid were allocated pensions, market-linked pensions, or account-based pensions.