Since introducing ‘tax haven’ status for individuals 60 and over drawing an income stream from their SMSF, many SMSFs are now drawing pensions from their fund.
As part of the decision making process in establishing an income stream, consideration needs to be given to the current composition of fund assets and whether:
- specific assets will be segregated to the pension account(s); or
- all assets of the fund will remain pooled (unsegregated).
(Refer to article, “pension phase – to segregate or aggregate“)
A decision to retain all assets of the fund in a pooled or unsegregated environment will require actuarial involvement each year to prepare a section 295.390 (Income Tax Assessment Act 1997) actuarial tax certificate. The actuary role is to calculate the percentage of tax exemption from income generated by assets supporting the pension. A tax certificate is prepared to support the exempt pension income tax deduction being claimed within the SMSF Annual Return.
An actuary’s role for an SMSF paying an income stream is typically for tax exemption and/or adequacy where a defined benefit pension is being paid (e.g. life complying pension for Centrelink purposes established pre 31/12/2005).
When is an actuary certificate required?
I have outlined a range of examples of where an actuarial tax certificate would or wouldn’t be required within a SMSF:
| Examples (with unsegregated assets) | Actuary certificate required |
| John is drawing a pension, Jane is still in accumulation | Yes |
| Greg (single member) is drawing a Transition to Retirement income stream (also making contributions) | Yes |
| John and Jane are both drawing pensions | No[1] |
| On 1 October, John and Jane commence drawing pensions | No[2] |
| Paul is drawing a pension. He then makes a $450,000 contribution into the SMSF.
- He leaves the money in accumulation - He commences a pension immediately |
Yes
No |
| Wes was drawing a pension and died on 2 Feb 2010. The money is paid from the SMSF as a lump sum to his estate.
- single member fund - more than one member |
No*
Yes |
[1] Where all fund assets convert to pension, it is considered that the SMSF is segregated and therefore all assets are exempt from tax.
[2]. As per above. Income generated from 1/7 to 30/9 will be assessable and from 1/10 all income is exempt (no need for actuarial certificate).
* There is an important consideration for estate planning purposes and using an actuarial certificate to assist in exempting capital gains on the payment of death benefits from the fund where there are no longer any dependants. Where the fund is no longer paying an income stream from the fund, the tax rate moves back from 0% to 15%. If there is only one member within the fund, it is considered a segregated fund for tax purposes. However, if another person was included (i.e. child, even with a small balance, it would allow for a actuarial certificate to be used to assist in exempting some of the capital gains on payment of the death benefit (would need to consider trustee issues of adding additional members).
Two important notes:
- An actuarial tax certificate is not required to commence an income stream (i.e. Account Based Pension); and
- Where the SMSF has incurred a tax loss a tax exemption certificate from an actuary is not required.
Adequacy of a Defined Benefit Pension (DBP)
Up until 31 December 20o5, SMSFs had the ability to pay a defined benefit pension. These were very attractive at the time for both RBL compression and 100% asset test exemption for Centrelink. DBPs continue to exist within the SMSF environment in particular for those obtaining an Age Pension from the government.
As part of the annual requirements of all SMSFs paying defined benefit pensions (lifetime, life expectancy, fixed term, flexi), the actuary is requried to obtain a valuation of the fund’s net assets to determine whether there is a “high degree of probability that the fund will be able to pay the pension as required under the fund’s governing rules”.
Centrelink each year requests from SMSF trustees a copy of the annual actuarial certificate of a defined benefit pension to ensure it continues to be solvent and is operating in accordance with the terms and conditions of the pension. With the GFC, there have been many of these pensions that become ‘insolvent’ and members have needed to reconsider their financial position and the impact of potentially losing (and having to pay back) their Age Pension entitlements. Fortunately for those member’s pensions impacted by the financial crisis, relief was provided from the government to permit such pensions to be commuted to an account based market-linked income stream without a Centrelink debt being raised.
Hi,
Regarding your article ‘When does my SMSF need an actuary certificate?’ I was wondering if you had legislation or a ruling to support your opinion that you do not need a certificate in the case of On 1 October, John and Jane commence drawing pensions. I can’t see the difference between this situation and the situation where Paul is drawing a pension. He then makes a $450,000 contribution into the SMSF. Both situations have part of the assets in the fund not allocated to pension accounts.
Hi Luke,
Thanks for your question. The legislative reference is within subdivision 295-F of the ITAA 1997, that discusses exempt pension income. The pension commencement in October where both members convert to pension, means that the fund can readily recognise assets in accumulation phase (July – Sep) and then pension assets (Oct – Jun). From an accounting perspective, segregation allows for the income to be specifically separated for the purposes of tax exemption in accordance with s.295-385. There is no difference to this method if a $450k contribution went into the fund and a new pension was started on the same day. If the new contribution was held in accumulation for a period of 1 day or more, then the fund needs to either obtain an actuary certificate to determine the exempt % or else segregate the accumulation assets from the pension assets to determine the fund’s exempt pension income.
Hope this helps…
Hi,
I went to a webinar yesterday and was informed that you would lose the tax exemption status if you applied for actuarial certificate after the due lodgement date of a SMSF annual return. Can you clarify if this is the case? I could not find a reference to support this. The only reference l found was where you had to obtain a actuarial certificate for a segregated fund before the lodgement of the SMSF annual return, which implies to me, obtain actuarial certificate before the actual lodgement of SMSF annual return and not before the due lodgement date.
Thanks for the very informative web site.
Regards
Ivan Perkovic
Hi Ivan,
Thanks for your email and feedback about the webinar. What Geoff was referring to in the webinar was that you need to obtain an actuarial certificate before lodging the tax return. You can’t claim the deduction for exempt current pension income if you don’t have an actuarial certificate, unless the assets of the fund have been segregated.
Regards,
Aaron
Hi Aaron, great work here!
I might be doing myself out of some business here, but I think the following note is an important one that many people are not aware of.
If there is no claim for exemption from income tax for the financial year in question, there is no requirement for an actuarial certificate. Even in the circumstances where the Fund has a combination of pension and accumulation accounts and the assets are unsegregated (unless there is a Defined Benefit Pension in the Fund). The certificate is required ONLY to support the claims for exemption from income tax – if there is no claim for exemption (i.e. if all earnings are being treated as taxable) there is no need to obtain an actuarial certificate.
So, if the amount of income tax likely to be saved by claiming the exemption is less than the cost of obtaining an actuarial certificate, the Trustees will be better off if no claim for exemption is made. This might be the case when a pension commences only near the end of the financial year in question, or if the returns from investments have been losses, or very small gains.
Thanks again for helping to improve the level of understanding of SMSFs!
Cheers,
Andy
Thanks for your valued input and actuarial expertise Andy. People can obviously find out more about these actuarial support issues via you and your website, http://www.act2.com.au
Regards,
Aaron