Why You Need An Actuary Certificate

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There are a lot of things to consider when running a Self-managed super funds (SMSF), depending on what stage of life you are in and what you are asking of your fund. It is much easier when you are in the accumulation phase where a member of your fund is retiring and the fund is starting to pay out a pension, but there are some additional administrative tasks that you need to pay extra attention to. Many SMSF trustees do not recognize or understand the need for an actuary. You need an actuarial certificate for your SMSF accumulation in the pension account for the fiscal year in which the earned or earned capital gains are allocated to the accumulation of the fund. While we create SMSF accounts for our clients, we have to make a decision whether to pay new pension contributions into the fund, leave contributions for fund accumulation or receive actuarial certificates.

In all three cases, an actuary is required to determine the percentage of funds in the pension and the percentage in accumulation averaged over the year. If the balance of the member funds is not separated in the transaction, no actuarial certificate is required for this year. Furthermore, if the actual certificate is only required for the year in which a member leaves, the actuary must use a proportional method to calculate whether the funds are exempt from the current retirement income. 

The actuarial certificate is required to support an application for exemption from income tax on the pension portion of the fund if there is an accumulation balance (pension balance) in a year and this balance is not supported by separate assets or a full year of income. In addition, a tax exemption certificate must be obtained before filing a fund income tax return. For a fully funded retirement year, the certificate is also required for 100% of income (ECPI).

Self-managed super funds (SMSFs) with account-based pensions in retirement do not need to obtain an actuarial certificate until their self-managed Super Fund Annual Return 2022. However, if a member receives an SME pension with a total surplus of under $1.6 million on June 30 of the previous financial year, the SSF will require actuarial certificates for its retirement and non-retirement accounts at any time in the financial year. Certificates must be issued by a qualified actuary, and the average cost of an actuarial certificate is $220 for an SFSF with an account-based pension of more than lifetime to meet the pension.

An actuarial certificate created by an actuary checks how much of a self-managed super fund’s (SMSF) profits come from fund accumulation accounts and retirement accounts and calculates a percentage of tax-free income, says Stephen Welsh, Clayton Foster Accountant. An actuarial certificate for an SME is a declaration of an actuarially certified share of the fund’s net income which is exempt from income tax (sections 295 and 390 of ITAA 1997) if the fund offers a defined benefit pension and its assets are sufficient to cover its liabilities. The purpose of the certificate is to indicate the percentage of fund income that is tax-free.1 The gains on non-retirement assets are taxed during the accumulation phase, while 15% of the income from retirement assets is tax-free. 

If a fund is in the retirement or non-retirement phase, each account year comprises a period during which the fund is considered separate and a period during which the assets generate tax-free income. 

The actuary certification is a prerequisite to avoid running a separate fund as it creates manual labour and takes time and resources away from running your SME. When complaints are made to an actuary, it is for the Institute of Actuaries of Australia (IAA) to determine whether there is a penalty for the client to lodge a formal appeal. You need an actuary in Australia if your fund pays a pension but does not separate assets or if the pension it pays is an accumulation of money in a super fund. An actuary’s certificate is issued solely for the purpose of granting tax exemptions on taxable income, including realised capital gains, from your fund assets. Defined Benefit Superannuation Fund differs from an SMSF in that although it provides members with a defined pension amount, it does not provide a pool of assets that can be increased by further contributions from members “own pension account, nor does it carry any investment risk.

Retirement and non-retirement funds must take into account total annual income and expenditure on a fair and reasonable basis; one method is to use the ECPI percentage (1% actuarially exempt income share) indicated on the actuarial certificate. 

This certificate is used when you begin drawing your pension to determine how much of your SME’s income is exempt from tax and what is taxed at the standard rate of 15%. 

Actuaries operate in life insurance, health insurance, pensions, and pension insurance, and are certified by the Society of Actuaries (SOA). SOA and CAS require an actuary to pass seven exams to achieve associate-level certification and to offer advanced fellowship-level certifications. Actuarial students can expect to work toward associate-level certification for four to seven years and fellowship certification for two to three more years, BLS reports.