When you need an actuarial certificate - updated guidance | Accurium

UPDATE: 7 Sept 2015 - ATO have revised their position, ECPI is optional and no actuarial certificate is required under the segregated method - read our latest blog article here.

The ATO have recently updated their technical guidance on claiming exempt current pension income (ECPI) and when an actuarial certificate is required. We believe that there are two key areas where current practice in the industry may differ from the ATO’s interpretation and hence practitioners should be mindful that:

  1. Segregated pension assets need to be in place for the entire financial year to remove the need for an actuarial certificate.
  2. Claiming ECPI is not optional.
Segregated pension assets

The ATO has recently updated the section on its website explaining the tax exemption on pension assets. It sets out the three requirements for claiming ECPI without needing an actuarial certificate (link to webpage):

The ATO states that you will not need to obtain an actuarial certificate to claim ECPI if:

  • you want to claim the tax exemption using the segregated assets method,
  • the assets were segregated for the entire year of income,
  • at all times that pensions were payable during the income year, the SMSF only paid allocated pensions, market-linked pensions or account-based pensions, and no other type of pension.

Note that if a fund is entirely in pension phase and only has account-based pensions for the whole year, the ATO will consider that all fund assets meet the requirement of being segregated.

In a recent speech to the Tax Institute (read whole speech here) Matthew Bambrick, ATO Assistant Commissioner, highlighted that:

'To be exempt from an actuarial certificate, you must use the segregated method for the entire income year. The number of funds which start a pension part way through the year and rely on this actuarial exemption remains high. This creates a problem if these funds face compliance action because of the requirement to obtain an actuarial certificate before lodging the annual return in order to be entitled to claim ECPI'.

We understand that this is likely to represent a change in approach for many SMSF practitioners. Some common circumstances where this may trip people up include:

  1. Pensions commenced partway through a tax year. The ATO have stated that for account-based pensions to be classed as segregated pensions and not require actuarial certification they must be in place for the entire year. If a fund has any pensions starting mid-way through a financial year then an actuarial certificate will be required in order to claim ECPI. Therefore, to avoid the need for an actuarial certificate it is important that any pension commencement occurs on 1 July.
  2. Pension ceased partway through a tax year. The same argument would apply for commuting pensions. If a fund ceases a pension on any date other than 30 June then it is likely to need a certificate in order to claim ECPI.
  3.  Using contributions and rollovers to start new pensions.  Our understanding is that a similar treatment would apply to funds that receive new contributions or rollovers and immediately commence new pensions. Because these pensions would not have been in place for the entire financial year the fund would require an actuarial certificate.
  4. Implementing segregation strategies. Funds putting in place new investment strategies with segregated pension assets need to ensure these are in place for the entire tax year to avoid the need for an actuarial certificate.
Claiming ECPI is not optional

Bambrick’s speech also highlighted another area where the ATO’s interpretation of the legislation around ECPI differs from many in the industry to date. He noted:

'declaring ECPI is not optional. What I mean is that the income of an SMSF is either assessable or exempt. A trustee cannot re-characterise the income simply by not obtaining an actuarial certificate. Therefore, where a fund is using the unsegregated method, an actuarial certificate is required to determine the portion of the fund’s income considered as exempt income'.

Many in the industry had been of the view that trustees were not obliged to claim ECPI where, for example, the cost of doing so outweighed the tax benefit. Rather than pay for an actuarial certificate and claim ECPI, it was thought that trustees could opt to pay tax on the income instead. The ATO have now clarified that this is not the case. Where a fund is paying pensions at any point during the year then it must claim the appropriate amount of ECPI. This ECPI must be claimed using the unsegregated method (by obtaining an actuarial certificate) or/and using the segregated method.

Should you have any questions on either of these issues please contact the Accurium team on 1800 203 123.

The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances.  While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.