An actuarial certificate contains a lot of information. But what does it actually tell you? And do you even need one?
Actuarial Certificates
Not every fund needs an actuarial certificate. Whether you do or don’t depends on a range of things.
To listen while you drive, walk or work, just access the episode through a podcast app on your mobile phone.
No Actuarial Certificate Required
There are quite a few reasons why a fund might not need an actuarial certificate. You don’t need an actuarial certificate when one of the following applies. The fund
# 1 Is fully in accumulation for the entire year
# 2 Is fully in retirement phase for the entire year without disregarded small fund assets
# 3 Goes from fully in accumulation to fully in retirement phase without mixed periods or disregarded small fund assets
# 2 Chooses not to claim ECPI, for example because of low or no income
Actuarial Certificate Required
But there are also quite a few scenarios where the fund does need an actuarial certificate. The fund needs an actuarial certificate when one of the following applies. The fund
# 1 Has mixed periods of accumulation and retirement phase accounts existing side by side at the same time, or
# 3 Has disregarded small fund assets
Here is a handy flow chart designed by Accurium to see whether you need an actuarial certificate.
Correct Information
Actuaries depend on receiving correct financial data. Their certificate can only be as good as the data they receive. When you apply for an actuarial certificate make sure that you
# 1 Recorded all transactions
# 2 Correctly recorded these transactions
# 3 Ran the correct period updates
# 4 Correctly advise whether a TRIS is in retirement phase or not.
# 5 Answered the question correctly about whether the fund is eligible to use the segregated method.
This question in # 5 relates to disregarded small fund assets. It is not asking if the fund used segregation. It is asking whether the fund is eligible to use segregation. If a member in retirement phase has a TSB of more than $1.6m, then the answer is No since the fund is not eligible to use segregation with a TSB of more than $1.6mfor a member in retirement phase.
Deductibility of Expenses
A fund can deduct an expense to the extent it incurred the expense in producing assessable income. The allocation of expenses between exempt and assessable income needs to be done on a “fair and reasonable basis”.
For a fund solely in non-retirement phase for an income year all income is assessable and hence all expenses are fully deductible.
For a fund solely in retirement phase for an income year, all income is exempt income, hence expenses are not deductible.
When a fund has both retirement and non-retirement phase accounts over the entire income year, then the expense needs to be apportioned on fair and reasonable basis.. One method is to just use the the ECPI percentage listed on the actuarial certificate (1 – actuarial exempt income proportion). Another is to use the TR 93/17 method of assessable income / total income.
If a fund had assets elected to be segregated pension assets, then the amount of expense relating to segregated pension assets is not deductible.
When a fund has both retirement phase and non-retirement phase accounts in the year, including periods where the fund had deemed segregation, then there are periods where assets were solely producing exempt income. So this requires a fair and reasonable approach.
Actuarial Certificate
What does an actuarial certificate actually look like? What does it tell you? Here is an example for a fictitious SMSF. Let’s call it the Smith Family Superannuation Fund of John and Jane Smith.
It all starts with a reference to the relevant legislation s295-390 ITAA97. And a list of the most important information: the name of the fund, the relevant financial year and what this certificate is about.
ECPI Percentage
And then it cuts straight to the chase. It gives you the ECPI percentage. This is the key information you need. Most accountants and trustees only ever look at this percentage. The percentage has three decimals.
“I hereby certify that the proportion of the applicable income of the [Smith Family Superannuation Fund] (‘the Fund”) for the year ending 30 June 2018 that should be exempt from income tax is: 52.823%.”
And then comes some important advice. The actuary’s calculation does not include segregated assets. Those sit in a separate pot. You treat their income separately.
“This exempt income proportion does not apply to income earned on segregated current pension assets and segregated non-current assets.”
Then it just references to Appendix A and B to make sure that these form an official part of this certificate.
And finally just a reference to the actuary’s professional standard. Any actuary licensed to issue an actuarial certificate is a member of the Institute of Actuaries in Australia.
So that is the official certificate. Now we come to the appendices.
Appendix A
Appendix A outlines the information the actuary used to calculate the exempt income proportion. This is important. If this information is incorrect, then the ECPI percentage is obviously also no longer correct.
“Fund data and financials
This certificate has been prepared at the request of, and based on data supplied by [name of the accountant] on behalf of the Trustees for the 2017/18 income year. A summary of the data supplied to us for the purpose of calculating the exempt income proportion is provided below:
Name of Fund: Smith Family Superannuation
Fund ABN: 12345678910
Trustee: Smith Family
Member name: John Smith and Jane Smith
Date of Birth: Birth dates
Value of retirement phase income streams as at 1 July 2017: $1,600,000 each
Excluding liabilities in respect to segregated current pension assets: $1,600,000 each
The aggregate operating statement information is:
Assets available at 1 July 2017 $6,060,000
Less
Pension payments and lump sump withdrawals $160,000
Equals
Balance before income and expenses $5,900, 000
Preliminary net income $ 200,000
Gross assets available at year end (before tax) $6,100, 000
We understand that the financial information provided to us when applying for this certificate may be unaudited. Should the financial information provided to us change, as a result of audit or otherwise, this may affect the results of our calculations and we recommend you apply for an amended certificate.”
Assumptions
Then it lists the relevant assumptions. In this case there are no further assumptions.
And then it comes to an important topic: Disregarded small fund assets. The fund has disregarded small fund assets since John and Jane are both in retirement phase and each have a TSB exceeding $1.6m. So the actuary used the proportionate method.
“The information provided to us indicated that this Fund had disregarded small fund assets, as defined in section 295.387 of the ITAA 1997. The Fund therefore had no segregated current pension assets or segregated non-current assets and could not use the segregated method to claim exempt current pension income during the income year.”
Minimum Pension Standards
The fund loses its exempt status and can’t claim ECPI if it hasn’t made the minimum pension payments. So the actuarial certificate includes a reference to this important point.
Appendix B
And then there is Appendix B. It explains in a lot more detail how the actuary determined the ECPI. As well as the method used.
“Superannuation funds claiming exempt current pension income (“ECPI”) under section 295,390 of the ITAA 1997, known as the proportionate or unsegregated method, are required to obtain an actuary’s certificate prior to lodgement of the fund’s income tax return. The proportion of the applicable income, excluding income earned on segregated current pension assets and segregated non-current assets, for the year ending 30 June 2018 that should be exempt from income tax is calculated as follows:
Average value of current pension liabilities / Average value of superannuation liabilities = $3,234,567 / $6,123,456 = 52.823%
Within the requirements of legislation and the Fund’s Trust Deed rules, the Trustees may have discretion about how income and expenses are allocated at the member level. We have not checked the terms of the Fund’s Trust Deed Rules. The daily weighted average calculation of the exempt income proportion provides a fair and reasonable method of apportioning these items between the member accounts at year end for income earned on assets that are not segregated assets and is provided below:
Member Name John Smith Jane Smith Fund
Exempt income proportion 26.411% 26.412% 52.823%
Non-exempt income proportion 23.177% 24.000% 47.177%
The above proportions are unlikely to be appropriate for allocating income earned on segregated assets.
Calculating the fund’s exempt current pension income for the purpose of your tax return
The exempt income proportion is applied to net ordinary assessable income including net capital gains, but excluding assessable contributions, non-arm’s length income and income including capital gains or losses derived from any segregated assets. The Trustee would calculate ECPI as follows:
Total ECPI = Eligible income * Exempt income proportion + Income on segregated current pension assets
Unutilised capital losses (except capital losses on segregated current pension assets) can be carried forward until they can be offset against assessable capital gains.
Adequacy opinion and methodology
By definition, the liabilities of an account-based member interest or reserve at a particular time, in the absence of any unusual terms or guarantees, are equal to the value of the assets backing it. Therefore we have not made specific assumptions regarding rates of the return on the Fund’s assets, pension increases; or the liability calculation discount rate. As such, I am satisfied that the amount of the assets at the end of the year, if accumulated together with the Fund’s future earnings and contributions, will provide the amount required to discharge in full the liabilities as they fail due…
The average values used in the exempt income proportion are determined using a daily weighted average calculation which takes into account relevant information such as the opening balances of each member account, any reserves, and the size and timing of any member transactions during the income year. Unless otherwise stated, all member transactions including pension commencements and commutations are assumed to occur immediately at the start of each day.”
MORE
Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s personal circumstances.