Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 253

Check tax exemption on income from super pension assets

There is confusion about which method to use when calculating the tax exemption on income from assets supporting superannuation retirement pensions. This confusion stems from changes to the superannuation law that took effect from 1 July 2017 and the Tax Office’s interpretation of the tax law. Let’s clear this up.

The difference between segregated and unsegregated assets

As SMSF members will usually retire at different times, and because the tax treatment of income from SMSF assets differs between accumulation and pension phases, the correct proportion of tax-exempt and tax payable income needs to be determined. There are cases where specific SMSF assets are held for the benefit of specific members, meaning there is a segregation of assets. Or the assets can be unsegregated, where the SMSF’s assets and income will be supporting all members, retired or not. The existence of segregated or unsegregated assets determines how the tax exemption is calculated.

Unsegregated versus segregated method

If an SMSF has a member with a total super balance in excess of $1.6 million (as at prior 30 June) across all of their super funds, and the person is in receipt of a retirement pension, then the SMSF can only calculate the tax exemption using the unsegregated or proportionate method. This is regardless of whether the SMSF’s pension assets were segregated at any time during the current financial year.

If an SMSF has members in receipt of retirement pensions and each of these member’s total superannuation balance does not exceed $1.6 million across all their superannuation funds at 30 June of the previous financial year, then the SMSF can claim the tax exemption using the relevant segregated and/or unsegregated method.

For fund members with a total superannuation balance not exceeding $1.6 million, the Tax Office’s interpretation of the tax law is based on whether the SMSF had pension assets that were segregated at any time throughout the financial year. If so, then the SMSF must calculate the tax exemption using the segregated method for that time period.

If, during a financial year, an SMSF did have pension assets that were segregated but at a later time it no longer had segregated pension assets, then it must use the segregated method to calculate the tax exemption for the time period where the pension assets were segregated. It must use the unsegregated method to calculate the tax exemption for the period the SMSF’s assets were no longer segregated.

Prior to 1 July 2017, SMSF trustees and professionals were simply using the unsegregated method to calculate the tax exemption when SMSFs had segregated pension assets at some time during the financial year, and unsegregated assets at other times during the same financial year. They did this to simplify the tax exemption calculation. Unfortunately, the Tax Office has stated that using the unsegregated method for those situations is no longer an option from 1 July 2017.

Let’s look at an example

Assume an SMSF has two members in the accumulation phase on 1 July 2017. On 1 October 2017, both members commenced retirement pensions with their total superannuation balance of $1 million each. Then on 1 December 2017, one of the members makes non-concessional contributions into the SMSF and on 1 February 2018 commences a second retirement pension account.

This means the SMSF was completely in the retirement pension phase during the periods 1 October 2017 to 30 November 2017 and 1 February 2018 to 30 June 2018. However, the SMSF was not entirely in the pension phase during 1 July 2017 to 30 September 2017 and 1 December 2017 to 31 January 2018. The SMSF trustee will need to take into account four accounting periods. They must apply the segregated method of a 100% tax exemption on investment earnings of pension assets during the period the SMSF was completely in pension phase and apply the unsegregated method to the other periods when the SMSF was not totally in pension phase.

The calculation of the tax exemption is certainly more complex now and it is most important that SMSF trustees and professionals are aware of this.


Monica Rule is an SMSF Specialist and author. See

May 15, 2018


A useful article as there is a lot of complexity being introduced with limited communication on the detail by the ATO to Trustees.

Re the statement in your article "If an SMSF has members in receipt of retirement pensions and each of these member’s total superannuation balance is less than $1.6 million across all their superannuation funds at 30 June of the previous financial year, then the SMSF can claim the tax exemption using the relevant segregated and/or unsegregated method."

Could you confirm this applies to the following situation when a member is receiving a pension from another Fund :

1. Member 1 of the SMSF (total superannuation balance of > $1.6m across all Funds) has an accumulation account in the SMSF. Member 1 is in receipt of a retirement pension from another Fund (not the SMSF)
2. Member 2 of the SMSF ( total superannuation balance < $1.6m) is in receipt of a retirement pension from the SMSF

Can the SMSF claim the tax exemption using the segregated method as each (the) member in receipt of the retirement pension in the SMSF has a balance of less than $1.6m?

Monica Rule
May 25, 2018

Hi Michael,

Sorry for the late reply. The answer to your question is "no". The SMSF will not be able to use the segregated method. I have outlined this scenario in my May Newsletter in example 2:

Example 2: Jack and Jill are members of their SMSF. At 30 June 2017, Jack has an accumulation account of $800,000 in his SMSF and a retirement pension account of $900,000 in another superannuation fund. Jill has a retirement pension account of $700,000 in their SMSF.

In this example, Jack has a total superannuation balance of $1,700,000 (i.e. $800,000 accumulation account in the SMSF + $900,000 pension account with another super fund). Jack has a superannuation interest with the SMSF (i.e. his accumulation account). Jill is receiving a retirement pension from the SMSF. The SMSF is ineligible to use the segregated method and must use the unsegregated method to calculate the tax exemption. An actuarial certificate will be required and must apply to the full year of income.

The full newsletter can be found here:

Ian Fehlberg
May 11, 2018

Under Related Posts
The top 10 hints for SMSF trustees before 30 June is for 2015.
Is there an updated 2018 version

Graham Hand
May 11, 2018

Hi Ian, we will publish some EOFY for 2018 in the next couple of weeks. The 'Related Posts' are automatically generated by the website and may not be the most up-to-date. We have many EOFY papers if you input 'EOFY' in the search box in the top right. For example, this from last year: and from the year before:


Leave a Comment:



6 quick SMSF tips for the 2021/22 financial year

Latest SMSF updates from the ATO

Top 10 hints for SMSF trustees before 30 June


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.