One of the advantages of an SMSF trustee commencing an income stream in his or her super fund is that the income and capital gains on the assets supporting the pension account become tax free. This is called Exempt Current Pension Income (ECPI), and it can end up being quite a substantial tax saving to an SMSF client.
However, in order to be able to claim ECPI, certain rules need to be met by the SMSF.
One of the requirements is to assess whether a fund needs an actuarial certificate to support the claim for ECPI. There are two methods for calculating ECPI: the unsegregated asset method and the segregated asset method.
What is an unsegregated asset method?
An actuarial certificate is most commonly required when a fund has both accumulation account members and pension members.
Accumulation account members are those who have either not yet commenced a pension or members that have both a pension account and an accumulation account. Having a pension and an accumulation account is common when a member commences a pension and then contributions or rollovers are made to the fund for that member. The contributions made after the pension commenced are used to create a new accumulation account, as these are unable to be added to a pension account.
An actuarial certificate is obtained by the SMSF trustee as the certificate calculates the percentage proportion of assets held that support the payment of pensions as opposed to those assets that support the accumulation account members. That way, the SMSF can use the actuarial certificate to calculate the ECPI applicable for the year. This method of calculating ECPI is called the unsegregated assets method.
A trustee maintaining an unsegregated asset strategy is required to obtain an actuarial certificate before the tax return is lodged for the SMSF. At Aquila Super, when the trustee elects to have unsegregated assets, we arrange for the actuarial certificate to be ordered on behalf of the fund so the preparation of the year-end accounts and tax return is not hindered.
What is a segregated asset method?
When all fund members are in receipt of a pension at the same time, an SMSF is not required to have an actuarial certificate, as all the assets of the fund are held to support the payment of pensions and the assets are basically deemed to be segregated assets.
However, when there are both accumulation accounts and pension accounts within the SMSF, the SMSF trustee may elect to use the segregated asset method to calculate ECPI and this does not necessitate an actuary’s certificate.
This method involves the trustee setting aside specific assets which are used to support the payment of the pension(s) and then the income and capital gains of those assets will be included as ECPI. This option is more complicated and requires a significant amount of additional work by the trustee and their accountant to ensure the cash and asset levels are appropriately linked to the relevant member interests.
Actuarial certificates are relatively cost-effective when compared to the additional work generally involved with maintaining a segregated asset strategy. Typical fees are between $110 to $200 + GST for an actuarial certificate.