4 things you need to know if you run a pension in your SMSF.
There are lots of things to consider when you run an SMSF, depending on what stage of life you’re at and what you require from your fund.
It can be a lot easier if you’re in accumulation phase, but as soon as one member of your fund hits retirement and your fund starts paying a pension, there will be some extra administration that you need to be aware of and get on top of.
Something a lot of SMSF trustees don’t realise, or understand, is the need for an actuary. If you run a pension in your SMSF, you will need to organise an actuarial certificate through an actuary.
And this refers to transition to retirement (TTR) pensions as well. But it isn’t a difficult process and these days an actuarial certificate is reasonably easy to organise for a cost of around $300 to $400.
Here is a quick outline of the profession along with examples of when you may, and may not, require their services.
What is an actuary?
In simple terms, actuaries use various mathematical techniques to make educated predications about the future. The profession has existed for several centuries.
Actuaries are amongst the most highly respected professionals operating in any field of work.
The Australian Government restricts the ability to describe yourself as an actuary unless you hold suitable qualifications from the Institute of Actuaries of Australia – IAA – which publicly trades as “Actuaries Institute”.
However, the Government leaves the IAA to determine what initial and ongoing studies you need to gain and hold these credentials. If a complaint is made against an actuary, then it’s the IAA that determines any penalties unless a client seeks formal legal redress.
When will you need an actuary and an actuarial certificate?
You will need an actuary if your fund is paying a pension, and your fund has not segregated the assets between the pensions it pays and any accumulation monies in the super fund.
The actuarial certificate’s sole purpose is to deliver a tax exemption on the taxable income (including realised capital gains) on your fund’s pension assets. No certificate, no tax exemption.
The certificate only has economic value to your fund if its cost is less than the tax the fund won’t have to pay. For example, if the certificate costs you $300, and it delivers only a $200 tax saving, then you might consider not bothering to get one.
When your SMSF won’t need an actuary
There are three situations:
- For the whole of a financial year, your SMSF only has members who receive pensions and the account balances of those pensions equals the total value of assets of the super fund.
- None of your SMSF members are receiving a pension.
- Your super fund pays one or more pensions and the account balances of these pensions is less than the total value of your super fund’s assets but your fund uses the segregated assets approach to prepare its financial accounts and regulatory return. At the very least, you would have to segregate assets between pension interests and non-pension – or accumulation – interests.
The actuarial certificate process
In essence, the actuary will ask you for details of all the transactions that have taken place in your fund.
The actuary then calculates a percentage and that number is placed on your certificate. You then use that number when completing your fund’s tax return to work out how much tax the fund doesn’t have to pay on its pension assets.
This percentage is the total average pension assets divided by the total average assets of your fund.
In effect, this is a weighted average. This means that the size and timing of transactions throughout the year affect the outcome. Transactions that occur on 1 July (at the start of a financial year) have a weighting of 1 and transactions that occur on 1 January (roughly half way through the year) have a weighting of approximately 0.5.
There is a range of circumstances – for example, if your fund has had significant realised capital gains or losses or has had large withdrawals – when these calculations can become a little complicated.
It’s this percentage value, which you then use to determine the amount of taxable income that is exempt from super fund tax.
Unless an SMSF is being wound up, these certificates aren’t issued for part of a financial year. They’re only issued for a full income year.
Regardless of these more complex situations, SMSF actuarial certificates aren’t complex for a highly trained actuary. In fact, most of this work is done by an actuary’s less qualified and experienced staff. Many actuarial firms have automated most of the work involved in completing these certificates.
Tony Negline has worked in financial services for more than 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees.