Income Tax Act Section 295 – 390 & SIS Regulations. 9.31

When income of a SMSF is exempt from tax

Income Tax liability of a SMSF is dependent upon whether the fund is in accumulation or pension phase or a combination of both. A SMSF is in accumulation phase when ALL members are making contributions to the fund and during accumulation phase Income of SMSF is taxed at the rate of 15%.

SMSF is in pension phase when at least one member is drawing an income stream benefit or pension (usually account based pension) from the fund. When all members of the fund are drawing an income stream then ordinary income earned by the SMSF is exempt from Income tax and you do not need an actuarial certificate.

But when a SMSF has a combination of both type of members, i.e. some members of the fund are in accumulation phase and some members are withdrawing pension. If the fund is a one member fund, the member has a pension account and is contributing to the fund, such as in case of ‘Transition to retirement income stream’. Then the fund needs an actuarial certificate.

When the funds assets are not segregated (accumulation assets are not separate from pension assets) then part of a fund’s income could be taxable and part could be exempt.

This exempt proportion (or percentage) of the fund’s income is dependent upon value of opening balance of pension / accumulation assets and the value of average pension liabilities relative to total value of fund balance.

Total income is declared in the income tax return of the fund and the exempt pension income is claimed as a deduction to calculate taxable income of the fund. Note that all deductible (concessional) contributions always are taxable and pay tax @ 15%.

To claim this deduction for exempt current pension income (ECPI), ITAA 1997 Section 295 -390 requires that an actuarial certificate determining ECPI percentage is calculated by a qualified and licensed actuary.

When an actuarial certificate is needed

When a SMSF commences a pension, ordinary income earned on assets supporting the pension is exempt from Income tax. This income is commonly referred to as Exempt Current Pension Income (ECPI). To claim this exemption two methods can be used.

Segregated assets method: Where assets specifically supporting a pension are set aside, like investments in Term deposits or shares equivalent to balance in pension accounts. These assets do not mix with other assets of the fund.

Un-segregated assets method: Where assets representing accumulation balances and supporting pensions are mixed up and can not be separately identified.

Funds using the segregated assets method do not need an actuarial certificate. But if the fund is using un- segregated method, for claiming ECPI an actuarial certificate is needed which certifies the proportion of exempt income.

Examples of situations when an actuarial certificate is needed:

Some members of the fund are in accumulation phase and some in pension phase.
A member is drawing Transition to retirement Income stream where he is drawing pension and the fund is receiving contributions as well for the member.
If one member started the year with an accumulation account but during the year this account gets converted into a pension account.

Examples of situations when an actuarial certificate will not be needed:

Where all the members are in accumulation phase for whole of the year.
Where all the members are in pension phase for whole of the year.
Where the fund is using the segregated assets method

Examples with un-segregated assets

Examples	Actuary certificate required
Michael is drawing a pension, Mary is still in accumulation phase	Yes Assets are un-segregated
Michael (single member) is drawing a Transition to Retirement income stream and his employer is contributing to the fund	Yes Some assets are in Accumulation
Michael and Mary are both drawing pensions and are not contributing	No Fund is segregated
On 1 July, Michael and Mary commence drawing pensions from the fund – there are no new contributions to the fund	No Fund is segregated
Michael is drawing a pension, he is the only member of the fund. He then makes a $450,000 contribution into the SMSF. - He leaves the money in accumulation	Yes Some assets are in Accumulation
Michael is drawing a pension, he is the only member of the fund. He then makes a $450,000 contribution into the SMSF - He commences a pension immediately	No Fund is segregated
Michael was drawing a pension and died on 1st Jan. The money is paid from the SMSF as a lump sum to his estate after all assets are sold on 15th May.	Yes On death the account moves to Accumulation phase

To Segregate Assets or not

Some funds can be relatively simple to fully segregate assets to avoid the need for an actuarial certificate, however, please note that segregation of assets requires a lot more administration work i.e. identifying and recording assets separately / separate bank accounts / allocation of each common expense (e.g. audit fees) in a manner that will satisfy the regulator and your auditor.

The un-segregated (mixed) approach is easier to manage and administer, where all fund assets are pooled together and a percentage of the pooled assets are paying a pension and remainder assets are in accumulation phase. Actuarial certificate then determines the percentage of income of the total income which is exempt pension income.

Income Tax Act Section 295 – 385 & SIS Regulations. 9.31

Adequacy laws as per the Superannuation Industry Supervision Regulations 1994

There is a requirement of all SMSFs paying defined benefit pensions (lifetime, life expectancy, Term certain, flexi), the actuarial valuation of a fund's net assets determines whether there is a "high degree of probability that the fund will be able to pay the pension as required under the fund's governing rules".

Centrelink pensioner receiving a defined benefit pension would also require a certificate each year. Our website cannot offer this certificates – however, if you phone our office on 02 9638 4096 we can arrange for you to speak to our actuary.