Exempt current pension income (ECPI) is the amount of income that is exempt from taxation inside an SMSF. An SMSF has exempt income if the SMSF has a pension or pensions that comply with pension standards each year. For example, XYZ Superannuation Fund has two members both in pension phase and no accumulation balances. This SMSF would be 100% tax free and therefore any income made throughout the year would be considered to be ECPI. If at any time the pensions for which the exemption has been granted do not comply with pension standards, the SMSF will lose its exempt current pension income at tax time.
When an SMSF has both pension accounts and accumulation accounts running at the same time, an actuarial certificate is required to confirm the correct tax free percentage of the SMSF’s income. The actuarial certificate will take into account the timing and amount of every contribution, pension payment and member transfer. A higher actuarial percentage will result in higher ECPI and less tax to pay.
It is important to remember that if an SMSF has an ECPI amount, that only the taxable percentage of expenses will be used. For example, the WWE Superannuation Fund has an actuarial percentage of 90%. This means that the taxable proportion of the SMSF’s income is 10% and therefore only 10% of expenses can be deducted from the SMSF’s remaining income. To further illustrate the point, if the SMSF is 100% tax free, no expenses will be used because there is no income for the expenses to be deducted from. Expenses cannot be banked or saved like capital losses. So in 100% pension phase expenses cannot reduce taxable income.