Changes to actuarial certificate requirements for SMSFs

SMSF trustees no longer need to obtain an actuarial certificate when calculating exempt current pension income (ECPI) where all members of the fund are solely in retirement phase for the entire financial year.

The changes will commence from 2021/22 and later financial years.

Background

ECPI refers to investment income that is exempt from tax because the fund is providing a retirement phase pension (i.e. an account-based pension). As a general rule, if all of the member accounts in the fund are retirement phase pensions, all of the fund’s investment income is ECPI (i.e. 100% exempt). Although if only a proportion of the accounts are retirement phase pensions, then only part of the fund’s investment income is ECPI.

Currently, SMSFs solely in retirement phase that have ‘disregarded small fund assets’ (DSFA) are required to obtain an actuarial certificate to claim ECPI even though income is 100% exempt.

To recap, the DSFA rule prohibits an SMSF from using the ‘segregated method’ when calculating ECPI for all members in a financial year where:

  • The fund has at least one retirement phase income stream at any time during the financial year, and
  • A fund member has a total superannuation balance (TSB) of more than $1.6 million just before the start of the financial year (note: an individual’s TSB is the value of all their superannuation interests, including those outside the SMSF), and
  • That member is receiving a retirement phase income stream from any fund (i.e. the SMSF or another super provider) just before the start of the financial year.

This requirement forces trustees to obtain an actuarial certificate and use the ‘proportionate method’ to claim all investment income as ECPI even when the SMSF is in pension phase all year.

The changes

The law has been amended to remove the requirement to obtain an actuarial certificate where:

  • The fund is regarded as having DSFA, and
  • All members are solely in the retirement phase for the whole financial year.

This means that SMSFs who were fully in retirement phase and only paying pensions can use the segregated method to calculate their ECPI and will not be required to obtain an actuarial certificate for their 2022 SMSF annual return.

Example

James’ SMSF is 100% in retirement phase from 1/7/2021 to 30/6/2022.

As at 30/6/2021, James’ TSB was $1.8 million. This is made up of a $1.2 million account-based pension and a $600,000 reversionary pension that reverted to him from his late wife (note: James will need to commute the excess to avoid an excess transfer balance assessment).

James’ SMSF would have DSFA but it is solely in retirement phase for all of 2021/22.

This means James’ SMSF is not covered by the DSFA provision and he can use the segregated method. James claims all income and net capital gains earned in 2021/22 as ECPI (100% exempt) using the segregated method (i.e. no actuarial certificate is required).

A final point…

An actuarial certificate will still be required for funds where it is possible that at any time during the financial year, assets and earnings are greater than the estimated liabilities, even if all members are fully in retirement phase. This is commonly seen in legacy (non-account based) pensions.

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