general info about actuarial certificates


claiming a tax exemption on pension income

Once a superannuation fund commences to pay an income stream or pension, it should be possible to claim a tax exemption in the annual return (Section C-K) for certain income backing the current pension liabilities. This income is called the Exempt Current Pension Income (ECPI). It does not include income assessable contributions or non-arm’s length income.

 

The exemption is not automatic – certain conditions must be met, including whether an actuarial certificate needs to be obtained. Please note that this manual considers only account based pensions such as market linked (TAP) pensions, allocated pensions (AP) and Account Based Pensions (ABP). If the fund has defined benefit pensions, then a certificate will be needed and the report will need to include other issues such as adequacy of assets to cover liabilities on both a best estimate and high probability basis.

 

Account based pension liabilities are normally simply the total account balance. There are two methods available for trustees to work out the exempt income – the segregated method and the non-segregated method. A combination of both methods can be used and the approach adopted can be altered from year to year.


segregated assets method

If a complying fund segregates its assets so that the income can be identified as derived from the segregated assets held to provide for the current pension liabilities, then that income is exempt income. The legislation is Section 295-385 of the ITAA 1997.

 

An actuarial certificate is not required if all pension assets are segregated at all times during the income year and the pensions are only account based pensions.

 

Segregating assets normally involves a lot more work. Each transaction has to be allocated to one or other of the segregated asset pools. In essence, these separate accounts then need to be consolidated. The extra work may be worthwhile if there is a large capital gain that can be exclusively allocated to the exempt pool. It works against the fund when there are realised losses. The unsegregated assets method would allow some deductions for the loss.


unsegregated assets method

When assets are unsegregated, i.e. records are only kept at a fund level, the tax exempt proportion is provided by the actuarial certificate. The legislation is Section 295-390 of the ITAA 1997. The proportion of income that is exempt is calculated by the actuary from:

 

The average value of the current pension liabilities over the financial year (excluding liabilities for which segregated current pension assets are held)

Divided by:

The average value of superannuation liabilities (excluding segregated current pension assets or segregated non-current assets).

 

For the pensions we are considering here, liabilities and account balances are the same thing. An actuarial certificate is always needed for this method.


expenses and income losses

The tax exemption percentage is applied to ordinary assessable income (excluding assessable contributions and non-arm’s length income). This same percentage is also useful with regard to expenses. Generally, expenses which the superannuation fund has incurred in deriving exempt current pension income cannot be claimed and must not be included as part of the deductions claimed in the SMSF annual return. Certain specific deductions can be claimed in full, if they provide exempt or assessable income – for example, tax related expenses such as the supervisory levy and death and disability premiums. Where the expense relates to both accumulation and super income stream based income, it can be proportioned with calculated percentage.

 

Tax losses (not capital losses) must be offset against exempt current pension income first. Once the assessable income is reduced to zero, any further losses can be carried forward. Taxation Ruling TR93/17 provides further advice.