A Self Managed Superannuation Fund (SMSF) that pays a pension may be required to obtain an annual actuarial certificate. The Reasons for this are:
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.
