Most SMSFs paying retirement phase pensions need an actuarial certificate so they can claim a tax exemption on some of their investment income (known as exempt current pension income or ECPI). However, sometimes they can get the exemption without the certificate. Most commonly this is when the fund is 100% in pension phase throughout the entire year but there are some others:
We’ll unpack these three examples shortly but first a note : in this article we’re talking exclusively about pensions that are either account-based or market linked pensions in retirement phase. Everything changes if a defined benefit pension is involved – they always need an actuarial certificate in an SMSF and it’s compulsory. And a fund paying only transition to retirement pensions doesn’t need a certificate at all (because they don’t qualify for a tax exemption).
We should also highlight that for funds only providing non defined benefit pensions, getting an actuarial certificate is never a compliance requirement, it’s a tax issue. It’s only needed if the trustee wants to claim a tax exemption on its investment income and needs an actuarial certificate to do so. There’s always the option of just not claiming the tax exemption. Sometimes this makes a lot of sense (for example, if the exempt amount would be really small anyway). If there’s no tax exemption being claimed, there’s no need for an actuarial certificate no matter how the fund is structured – as long as it doesn’t provide defined benefit pensions.
Imagine a fund that begins the financial year entirely providing retirement phase pensions. Later in the year, a member receives a contribution and on that very same day, the contribution (net of any tax) is used to start a new retirement phase pension.
Technically, for a brief moment, the fund had an accumulation balance and therefore needs an actuarial certificate. But in a practical sense that’s not how actuaries see it.
Because the contribution and the pension commencement happen on the same date, most actuaries (including Heffron) treat the events as occurring simultaneously – ie, the fund never actually had an accumulation balance. As a result, it remained fully in pension phase throughout the year.
That means it doesn’t need an actuarial certificate and can still claim a tax exemption on all the fund’s investment income.
It’s a great outcome but it hinges entirely on the timing. If that contribution had sat in accumulation, even for a day, things would look very different.
Another variation of this is when the fund starts the year with an accumulation balance, and the trustee uses all of it to start a pension on 1 July.
Again, we generally assume this means the pension commenced at the start of the day on 1 July and there’s no point in the year when the fund’s assets are supporting accumulation accounts.
The result? Again:
This only applies to some funds. Specifically, funds that are allowed to “segregate” their assets for tax purposes (we’ve talked about what that means, who can do this and how it impacts their choices for claiming ECPI previously – for example, here).
Funds that are allowed to segregate can choose not to get an actuarial certificate even if the fund is only 100% in pension phase for part of the year. The key is that they can’t have any mix of pension and accumulation accounts at any point during the year.
Funds that meet this condition:
(It’s worth noting that some of these funds that are allowed to segregate their assets do so voluntarily – ie, there are specific assets for the pension accounts. We’ve ignored those funds for this article as that gets more complicated. But certainly in some cases, they don’t need an actuarial certificate either.)
The key takeaway is this: in a fund that doesn’t provide defined benefits, an actuarial certificate is only required if the fund’s assets support a mix of accumulation and pension accounts at some point during the year.
If, for the entire year, every dollar of the fund supports retirement phase pensions, there’s no need. All of the fund’s investment income is exempt from tax.
Division 296 tax might change things. If the law is implemented in line with the draft legislation, an actuarial certificate will be needed to calculate the amount of “earnings” allocated to each member subject to the tax.
In this case, a different type of actuarial certificate will be required and may be needed for any multi-member fund where at least one member has more than $3m in super, even if the whole balance is still in accumulation phase.
We’ve written extensively on this before – not just the article above. Peruse our library here: