Most SMSF trustees know that when they start drawing a pension from their fund everything becomes tax free right? Wrong. Like all things super and tax related it is never that easy. In this article we will review the circumstances where an actuarial certificate is required.
What is an actuarial certificate?
An actuarial certificate determines the percentage of income that will be exempt from tax for a SMSF for a given year. The certificate needs to be prepared by an appropriately qualified actuary, with the average cost of the annual certificate at $220 where the SMSF has account-based pensions (more for life time complying pensions). The actuary needs to be provided with a significant amount of information to calculate the applicable percentage – including details of every single pension payment and every contribution made to the SMSF during the year. The percentage generated by the actuarial certificate is multiplied by the taxable income of the fund (excluding contributions) to generate an amount which is claimed as a deduction – this is how the tax exemption is accounted for in the tax return of the SMSF.
When is an actuarial certificate required?
The following examples highlight the common and not so common situations of when an actuarial certificate is required:
- Two member SMSF, one member drawing a pension, one member still in accumulation
- Single member SMSF, member simultaneously making contributions throughout the year while drawing a pension (i.e. transition to retirement strategy)
- Pension commenced for a member part way through a financial year
- Two member SMSF, both members drawing pensions, one member makes a single large contribution to the fund and commences a new pension with the amount
- Two member SMSF, one member passes away (pension and tax exemption stops) and the death benefit (either a lump sum or pension) is commenced several months later
- The SMSF is paying a defined benefit pension (lifetime, life expectancy, fixed term, flexi pension) – to determine solvency
When its not needed:
Generally an actuarial certificate is not required when pension assets are segregated or kept separate from accumulation assets. The most common time this occurs is when all members of the SMSF are drawing pensions and no longer making contributions – i.e. all assets of the SMSF are pension assets.
The other most common time when segregation applies is when the assets of various members a truly kept separate – i.e. totally different bank and investment accounts for the various members. This is sometimes seen when accumulating adult children are in the same SMSF as their pensioner parents.
An actuarial certificate is also not required when the SMSF has a taxable loss – which makes sense because there would be zero tax anyway!
To actuarial, or not to actuarial…
When we prepare SMSF accounts for our clients, we often need to make the decision of whether to immediately commence a new pension from contributions that made to the fund, or to leave them in accumulation and obtain an actuarial certificate. Where a transition to retirement strategy is in place and the SMSF is receiving regular contributions throughout the year (either quarterly or monthly) the decision is simple – an actuarial certificate would be obtained.
However when pension members make a large lump sum contribution, we generally will commence a new pension from the contributed amount. This is especially important when the amount is non-concessional (after tax) contribution as we always want to keep the components as tax free.
The challenge comes when the SMSF receives multiple contributions or deposits from members in quick succession – the intention from the members generally is that the amounts should be treated as a single amount, but in practice each deposit needs to be turned into a new pension. We strongly suggest that advice is sought in regards making large contributions to ensure the contribution caps are not breached, and the best outcome is achieved in terms of what new pension accounts are created.