Understanding ECPI for SMSFs

By Daniel Butler, William Fettes on 31/03/2026 in ATO, Pensions, SMSF compliance, SMSF strategy, Taxation, Trustee education

One of the most significant tax concessions available to SMSFs is the exemption for income derived from assets supporting retirement phase pensions. Exempt current pension income (ECPI) can substantially reduce or eliminate the tax payable by a fund once members commence retirement phase income streams.

However, the ECPI framework is often misunderstood. Advisers must navigate two calculation methods, legislative restrictions on the use of segregation and, since 1 July 2021, the ability in some cases to opt out of segregation for an income year where deemed segregation would otherwise arise.

This article provides a practical overview of the ECPI rules and the key issues advisers should consider when determining an SMSF’s exempt income position.

Legislative framework

The ECPI provisions are primarily contained in ss 295-385 and 295-390 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). These provisions determine the extent to which the ordinary and statutory income of a complying superannuation fund is exempt from tax while the fund is paying retirement phase pensions.

Broadly, ECPI applies to income derived from assets supporting retirement phase pensions, such as account-based pensions. The exemption applies to the relevant proportion of the fund’s income other than assessable contributions and non-arm’s length income.

An SMSF must determine any applicable ECPI using one of two methods:

the segregated method, or
the proportionate (actuarial) method.

Understanding the differences between these methods is critical in determining the fund’s exempt income position.

The segregated method

Under the segregated method, specific assets of the fund are treated as segregated current pension assets that support retirement phase income streams.

Where assets are segregated in this way, the income and capital gains derived from those assets are fully exempt from tax.

Segregation can arise in two ways.

Active segregation

Active segregation occurs where trustees deliberately allocate particular assets of the fund to support retirement phase liabilities for one or more members. For example, a fund may allocate a portfolio of listed shares and some deposits to support a member’s account-based pension while other assets remain in accumulation phase.

Where active segregation is implemented, the fund’s accounting records must track the income, gains and losses attributable to the segregated assets.

Deemed segregation

Segregation may also arise automatically where all members of the fund are in retirement phase and all fund assets are supporting pension liabilities. In this situation, the assets of the fund are treated as segregated current pension assets even if the trustees have not actively segregated specific investments.

A key feature of the segregated method is that no actuarial certificate is required to calculate ECPI.

However, as discussed below, legislative restrictions limit the availability of this method in certain circumstances.

The proportionate (actuarial) method

The alternative method for calculating ECPI is the proportionate method, sometimes referred to as the actuarial method. This method is by far the most popular method used as it is much easier to administer. We estimate that well over 90% of SMSFs with members in retirement phase would rely on this method, compared to the segregated method.

Under the proportionate method, the assets of the fund are not allocated between pension and accumulation interests. Instead, the exempt portion of the fund’s income is determined by an actuary using the formula s 295-390(3) of the ITAA 1997.

Broadly speaking, the actuary determines the ratio of average pension liabilities to the fund’s total superannuation liabilities over the course of the income year. The resulting percentage is then applied to the fund’s assessable income (excluding contributions and non-arm’s-length income) to determine the ECPI amount.

For example, if an actuarial certificate determines that 70% of the fund’s liabilities relate to retirement phase pensions, then 70% of the fund’s investment income for the income year will be treated as exempt income.

The proportionate method is commonly used where a fund has both accumulation and retirement phase interests during the year and avoids the need to track income, gains, losses and expenses attributable to specific assets.

The disregarded small fund assets rule

A key limitation on the use of the segregated method is the disregarded small fund assets (DSFA) rule. The DSFA rule precludes use of the segregated ECPI method where:

a fund is paying at least one retirement phase pension during the year and claiming ECPI;
any member of the fund has a total superannuation balance exceeding $1.6 million (not indexed) as at the prior 30 June; and
the member above the DSFA threshold is receiving a retirement phase pension from any source, ie, the SMSF or another superannuation fund.

Where the DSFA rule applies, the fund is effectively prevented from treating any of its assets as segregated current pension assets. Instead, the fund must calculate its ECPI using the proportionate (actuarial) method.

However, the DSFA rule does not apply where a fund is 100% in retirement phase for the entire income year, following a legislative change from 1 July 2021 that removed the requirement to obtain an actuarial certificate where the fund was 100% in retirement phase for the entire income year. In this situation, the fund will generally be treated as fully exempt under the segregated method.

One point to note here is that a fund which is 100% in retirement phase that incurs a capital loss will effectively lose that loss. That is, s 118- 320 of the ITAA 1997 disregards a capital gain or capital loss that a fund makes in relation to a segregated current pension asset for capital gains tax (CGT) purposes.

Accordingly, advisers should always consider whether the DSFA rule applies before determining that segregation is available.

Choice of ECPI method

Legislative changes applying from 1 July 2021 allow SMSF trustees to choose to treat the fund as not having segregated current pension assets for the entire income year in certain circumstances. This choice is contained in s 295-385(9) of the ITAA 1997.

The provision is relevant where a fund is fully in retirement phase for part of an income year, but has both pension and accumulation interests during other periods of the same year. Historically, this could result in funds having to apply different ECPI methods across multiple periods where segregated assets were taken to arise for part of the income year under the ATO’s view on deemed segregation (ie, for periods when an SMSF is 100% in retirement phase).

Under the current rules, trustees may instead apply the proportionate (actuarial) method for the entire income year, rather than grappling with a more complex approach involving multiple ECPI methods or periods during the same financial year.

However, the choice is only available where:

the fund is not fully in pension phase for the entire income year, and
the DSFA rule does not apply to the fund.

The legislation does not prescribe any formal election process for making this choice. In practice, the choice is reflected in how the fund calculates ECPI in its income tax return. Nevertheless, trustees should ensure that appropriate records are maintained documenting the chosen approach, such as trustee resolutions or working papers prepared in connection with the fund’s tax return.

This choice may be particularly useful where trustees wish to simplify ECPI calculations across the income year, or where it is desirable to preserve capital losses that might otherwise be disregarded under the segregated method.

Practical considerations for advisers

In practice, determining the appropriate ECPI method requires careful consideration of the fund’s circumstances.

A useful way to approach the issue is to consider three common scenarios.

Funds partly in accumulation and partly in pension phase

Where a fund has both accumulation and retirement phase interests during an income year, the proportionate method will typically apply. In these circumstances, an actuarial certificate will generally be required.

Funds fully in pension phase for the entire year

Where all members of the fund are in retirement phase for the entire income year, the fund will generally be treated as having segregated current pension assets, meaning all investment income of the fund will generally be exempt.

Funds fully in pension phase for part of the year only

Where a fund moves between accumulation and pension phase during an income year, eg, where a pension commences or a contribution is made, SMSF trustees may choose whether to apply segregated treatment for the relevant period or apply the proportionate method for the entire income year, subject to the DSFA rule applying to the fund.

The optimal approach will depend on the fund’s investment profile, including the extent of unrealised capital gains and whether the trustee wishes to simplify ECPI calculations.

Conclusions

The ECPI rules remain one of the most important components of the SMSF taxation framework. However, their practical application can be complex.

Advisers must understand the interaction between the segregated and proportionate methods, the restrictions imposed by the DSFA rule and the flexibility introduced by recent legislative changes.

With careful planning and appropriate documentation, trustees can ensure that their SMSF correctly applies the ECPI rules and maximises the tax efficiency of assets supporting retirement phase pensions.

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