- specific assets will be segregated to the pension account(s); or
- all assets of the fund will remain pooled (unsegregated).
For further details on this topic, refer to my previous 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 an actuarial certificate in accordance with section 295.390 of the Income Tax Assessment Act 1997 (ITAA 1997). The actuary’s role is to calculate the tax exemption percentage to be applied to income generated by assets supporting the pension. This certificate prepared forms the basis for the ECPI tax deduction claimed within the SMSF Annual Return. As you can see from the SMSF Annual Return below, this amount reduces the fund’s gross income to calculate a fund’s assessable income for a financial year.
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|
|On 1 October, John and Jane commence drawing pensions||No|
|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
|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
 Where all fund assets convert to pension, it is considered that the SMSF is segregated and therefore all assets are exempt from tax.
. 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).
Recently announced changes to allow for the continuation of a fund’s tax exemption after death until benefits have been paid to beneficiaries was seen as a positive outcome from the Commissioner’s views held in TR 2011/D3. It is important to note however, that the level of a fund’s tax exemption for the year in which a member died will most likely be determined by the segregated or unsegregated approach taken by the trustees of the fund.
Some important notes:
- An actuarial tax certificate is not required to commence an income stream (i.e. Account Based Pension); and
- If the SMSF has incurred a tax loss for the financial year, a tax exemption certificate from an actuary is not required.
- Trustees have an ability to make a ‘call’ on whether an actuary certificate is required – consideration of the fund’s tax position and the benefit of obtaining an exemption versus the cost is some that should be considered.
Legacy pensions – 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. Some DBPs continue to exist within the SMSF environment in particular for those obtaining an Age Pensions 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 required 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.
Obtaining tax exemption within a SMSF is a key concession available within superannuation law, however it is based on the member meeting the requirements of their pension rules and the regulations. Failure to meet these obligations will mean failure to have a pension during the year, with a fund losing its tax exempt status. Any actuary certificate obtained would be irrelevant.