What is an Actuarial certificate? Why do SMSFs need them, and why is it relevant now?
What is an actuarial certificate?
An actuarial certificate is a document issued by an actuary that helps an SMSF calculate the percentage of investment income that is tax-free and the amount that is not.
To understand this better, let’s see the phases of superannuation
Accumulation phase: During this phase, members contribute, and the investment grows. The contributions generally include employer contributions, personal contributions and investment earnings. The earnings in this phase are subject to a 15% tax.
Retirement phase: In this phase, members start drawing an income stream from their superannuation, which serves as their retirement income. Investments that generate earnings supporting the pension can be tax-free, up to the transfer balance cap.
Transition to retirement phase: This unique arrangement allows people nearing retirement to receive a pension by accessing a portion of their super while still employed.
So, if a superfund has members in both the accumulation and retirement phases, the investment earnings are calculated, and an actuary’s certificate is issued, noting the split.
Let’s consider this example,
A superannuation fund is owned by members who are in both the accumulation and pension phases.
60% of the fund’s money belongs to the pension phase, and 40% of it belongs to the accumulation phase.
This means that 60% of income is exempt from tax and 40% is taxable.
An actuary certificate explains this split to calculate the taxes correctly.
Why else do the SMSFs need them?
When the fund’s investments are pooled together: In this case, the assets might include shares, property income, and other investment income. So an actuary certificate determines the tax-exempt percentage. While this is a proportionate method for calculating tax exemptions, there is a segregation method in which the fund segregates specific assets for pension members and exempts tax on the income from those assets.
Accumulations and retirement within the year: When a member starts the year in accumulations, retires in mid-year, and starts a pension, the tax exemptions vary within the year, and this is calculated and noted properly in an actuary certificate.
Multiple pension members: If a fund has more than one member in the pension phase, and the other in the accumulation phase, the overall tax-exempted part of the fund is calculated in an actuary certificate.
When is the actuarial certificate not needed?
- When the fund is 100% in the retirement phase or 100% in the accumulation phase for the complete financial year
- Specific assets are clearly segregated as pension assets, and the income from such assets is tax-exempt.
- All the members are drawing pensions, and all fund assets are treated as fund assets during the year, which is also known as deemed segregation.
Why are actuary certificates talked about now?
The main purpose of an actuarial certificate is to
- Calculate tax accurately
- Ensure the fund complies with the ATO’s requirements
- Claim correct exempt current pension income (EPCI) deduction
An actuarial certificate is more crucial at the end of the financial year (30th June), when the SMSF annual returns are prepared for the period July to May, for preparing financial statements, audits, and tax returns, respectively.
As SMSFs become more complex and compliance becomes tighter, accurate pension calculations are more crucial from both regulatory and tax-saving perspectives.
Getting the right support
Accounting firms that handle SMSF lodgments can be supported by reliable partners who streamline the Actuarial certificate tasks.
When a support partner says, they can “liaise with an actuary provider, to provide an Actuary certificate for the fund”, what they mean is they can,
- Collect and prepare fund data
- Share the required data with the actuary
- Coordinate with the actuary to issue a certificate before lodgment
- Review the certificate for accuracy
- Share them with the accounting firms to utilise them for compliance purposes.
Sundaram Business Services provides SMSF admin and audit support to accounting firms and remains a scalable partner, whether it’s peak season or year-round.
