Tax exemption (as per the Income Tax Assessment Act 1936)

The purpose of a certificate is to determine the portion of the fund’s income that is exempt from tax. Only that income derived from pension assets is exempt from tax. The actuarial certificate will provide the percentage of fund income which is tax exempt.

If the Trustees are wanting to claim exempt current pension income (ECPI) from income tax, an annual 295.390 actuarial certificate is required if either:

a. a fund has both pension and non-pension accounts, and the assets backing the pension and non pension accounts are unsegregated, or

b. the market value of the assets supporting an income stream benefit exceeds the member account balance supporting the benefit. In such cases, the excess amount won’t be considered to be segregated current pension assets.

Note that if the Fund has incurred a tax loss a tax exemption certificate from an actuary is not required.

Adequacy (as per the Superannuation Industry Supervision Regulations 1994)

This is an annual requirement of all SMSF’s paying defined benefit pensions (lifetime, life expectancy, Term certain, flexi). The actuarial valuation of a fund’s net assets determines 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”. A Centrelink pensioner receiving a defined benefit pension would also require a certificate each year. For further details concerning the Centrelink requirements, please refer to the website of the Department of Families, Housing, Community Services and Indigenous Affairs.

Sometimes we find accountants do not want to apply for an actuarial certificate for the smsf’s that they administer, usually this is for a couple of reasons 1) they have calculated it themselves using the prescribed formula or 2) a pension began either late or early in the year and they believe the percentage is marginal and so not worth obtaining. This presumption may be correct but that is not the point, an actuarial certificate is a required to apply the exempt percentage. If the ATO comes calling they will not be interested in an accurate self calculations, only if that number is written on an actuarial certificate.

In these situations, the most important element to determine is the type of service being provided to the SMSF, BDO partner assurance and super, Shirley Schaefer, told the delegates at the Institute of Chartered Accountants in Australia 2011 Business Forum.  “It is just a platform service, a place to collect information, or is it actually a portfolio service or a wrap account where you’ve got a custodial relationship between the provider and the super fund?” Schaefer said.

“There will often be a statement on the bottom of them saying that the provider takes no responsibility for the accuracy or completeness of the information contained in the report”, Schaefer said.

In these situations, if the auditor chooses to rely on the information, he or she will be “hung out to dry”, she said.

When clients are using a portfolio service with custodial elements or a wrap account, they typically will not be given information such as holding statements, dividend butts, or contract notes.  However, in the absence of this information, the SMSF auditor does have a separate avenue to pursue in these circumstances.

“Under those circumstances there are requirements under various parts of the Corporations Act that those entities get their systems and controls audited and from that you can get a Part B Controls report”, Schaefer said.

If the auditor can acquire a Part B Controls report, the other information from the service provider can potentially be relied upon.  This is a problem that we as auditors have to deal with,  so at Guardian Audit Services as a matter of course when the fund is materially made up of assets reported via a wrap/portfolio product we include a limitation of scope paragraph.  We advise the trustees that we have had to rely on the work of other auditors to form our opinion, advising that in part we depend on the internal controls of the issuer.