What is an actuarial certificate?

A self-managed super fund (SMSF) that has a pool of assets supporting both pension and accumulation accounts is called an ‘unsegregated’ fund and an actuarial certificate is required in order to claim an exemption from income tax on fund earnings.

The certificate is a statutory requirement for trustees under Income Tax Assessment Act 1997 Section 295-390 and provides the trustee with a tax-exempt percentage. This represents the proportion of fund assets over a financial year supporting tax-free pensions, such as account-based pensions.

The trustee will apply this tax-exempt percentage against all assessable income earned on unsegregated assets of a fund in a financial year, excluding non-arm’s length income and assessable contributions, to determine the exempt current pension income (ECPI). This ECPI amount is reported in the annual return and effectively reduces assessable income and therefore the tax payable by a fund.

An actuarial certificate applies for a financial year and a new certificate is ordinarily required to be obtained from an actuary each year in order to claim ECPI. The tax-exempt percentage calculated by the actuary will change each year based on a number of factors. These include:

• member balances in pension and accumulation phase,
• the timing and size of transactions such as pension payments and contributions, and
• whether any significant events happened such as new pensions commencing, pension commutations, members passing away or leaving the fund, etc.

A fund does not have to obtain an actuarial certificate if they do not want to claim ECPI. This may be the case for example where a fund has no pension accounts, all income will be assessable. Also if the fund’s net income was negative the trustee may elect to treat all income as taxable and avoid the requirement for an actuarial certificate.

Where ECPI is claimed in the annual return, fund expenses must be treated consistently. For example, a general administrative expense can only be claimed as deductible to the extent it was incurred on assessable assets. This means the expense must be reduced by the tax-exempt percentage to work out how much can be claimed as a deductible expense in the annual return. The actuarial certificate will often state the taxable percentage (one minus the tax-exempt percentage) which is applied against the value of the expense to determine the deductible amount.

In order to obtain an actuarial certificate an actuary will need to be engaged. The actuary will request information about each member’s balances in pension and accumulation and details of all transactions which occurred over the financial year. They will also check with you to ensure each pension has paid a minimum pension payment during the financial year. If a pension has not met the minimum pension requirements, it will not be considered a pension for that year and therefore ineligible for consideration towards the tax-exempt percentage.

If your fund contains a complying defined benefit pension, this may be a lifetime pension or a life expectancy (term) pension, then a special type of actuarial certificate must be obtained each year. This certificate provides both the tax-exempt percentage and certifies adequate assets of the Fund are supporting the defined pension. These types of pensions are complicated and we suggest Trustees seek specialist advice around the ongoing management (including retention and/or commutation) of these pensions.

What’s changing due to the superannuation reforms at 1 July 2017?

At 1 July 2017 there are some key changes being introduced that may affect how and when you apply for an actuarial certificate.

A transfer balance cap (TBC) of $1.6M will limit how much a member can move into the tax-free retirement phase of superannuation, effective from 1 July 2017. Where an amount in excess of the TBC is identified, members will generally be required to remove the excess from the retirement phase of superannuation. This may involve commutations from one or more of their pensions and/or movement of the excess to an accumulation account prior to 1 July 2017. Where this occurs, it will be important for these transactions to be shown on the actuarial certificate application.

In some cases where a fund decides to commute part of their account based pension back to accumulation to meet the $1.6m requirement an actuarial certificate will now be required.

As the non-concessional contribution rules are also changing from 1 July 2017, some members may be looking at making a significant contribution under the current caps prior to 1 July 2017. It will be important for these transactions to be shown on the actuarial certificate application.

From 1 July 2017, the tax-free status of transition to retirement (TTR) pensions is being removed. These pensions are a special type of account-based pension that can be commenced prior to full retirement but impose an annual cap of 10% of the 1 July balance on withdrawals by the member. A TTR will no longer be considered to be in ‘retirement phase’ and eligible for a tax exemption on earnings. Earnings will be taxed like accumulation accounts, a tax rate of up to 15%.

Treasury Laws Amendment (2017 Measures No. 2) Bill 2017 has been introduced which provides for an exception to the removal of the tax-free status of TTR pensions mentioned above where the member has met a condition of release with a nil cashing restriction, such as attaining age 65. In this scenario the TTR pension will be a TTR income stream in the retirement phase, eligible for the tax exemption on earnings.

Finally, from 1 July 2017, where a member in an SMSF has a total superannuation balance (this includes balances in pension and accumulation both in the SMSF and in any other superannuation fund) of $1.6m or greater, and at least one member in the fund has a balance in retirement phase the fund will not be eligible to segregate assets for the purpose of claiming ECPI. What this means is that if a fund is solely in pension phase but a member’s balance grows in excess of $1.6m then an actuarial certificate will be required under the unsegregated method to claim all income as ECPI.

Obtaining an actuarial certificate

The process for obtaining an actuarial certificate is relatively simple and most actuaries have online application forms and quick turnaround times. The ATO regularly state ECPI as an area of compliance focus so it is important adequate records of member accounts and fund assets are kept in order to apply for the actuarial certificate and to correctly claim ECPI in the annual return.

Accurium have produced a flow chart outlining when an actuarial certificate is required in 2016-17 which you can access here.

The requirements for an actuarial certificate may be impacted by how your fund makes changes to comply with the incoming super reforms. These reforms are complex and we recommend you seek specialist advice to ensure compliance with the pension rules from 1 July 2017, and to make the most of the capital gains tax relief and any contribution opportunities to suit your circumstances.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.