Self managed superannuation funds—actuarial certificates

A superannuation fund may provide a pension. There are two distinct purposes for which the fund may need to obtain an actuarial certificate in relation to pensions. The certification provided and the information included in the actuary’s certificate can be very different, depending on the purpose for which the certificate is being obtained.

Valuation of pension assets for tax exemption

(required under the Income Tax Assessment Act)

A superannuation fund that provides a pension, including an allocated pension, will need to obtain an actuarial certificate. This is needed to qualify for exemptions from tax, on the fund’s income from assets, used to discharge current pension liabilities as they fall due. There are two classes of certificate depending on whether the assets being used to provide the pension payments are classed as segregated or unsegregated.

Segregated assets

For segregated assets the requirements are covered by section 273A of the Income Tax Assessment Act 1936 (ITAA 1936). Section 282B exempts from tax, the normal assessable income of the fund that is derived from segregated current pension assets. Further information is available from Income Tax Ruling IT2617 and Institute of Actuaries’ Guidance Note 452. The relevant assets must be segregated at all times during the period covered by the certificate.

Section 273B covers actuarial certification for segregated non-current pension assets. Segregated non-current pension assets do not qualify for tax exemption.

Unsegregated assets

For unsegregated superannuation liabilities the actuarial requirements are covered by section 283 of ITAA 1936 and IT2617, together with the Institute of Actuaries’ Guidance Note 451. In effect, the proportion of the fund's income determined by the actuary as relating to the fund's current pension liabilities is exempt from tax.

In practice, a fund that starts paying a pension part way through the financial year will need this type of certificate, unless it immediately segregates the relevant assets and obtains a valuation of those assets at the date the pension commences.

When must certificates be obtained?

For segregated assets the actuarial certificate may cover a maximum of 3 years. For unsegregated assets a new certificate is required every year. The certificate must be obtained by the fund no later than the date at which the tax return is due for a particular financial year (so that if a 3 year certificate is obtained it must be in place when the tax return is lodged for the 1st year of the 3 year period).

Allocated pensions need these certificates as well as other forms of pensions. However, if the fund received little taxable income, for example because of the effect of franking credits or low investment returns, then the expense of obtaining the certificate and claiming the exemption may not be justified.

Valuation of pension assets for adequacy

(required under the Superannuation Industry Supervision legislation)

A superannuation fund that provides a pension (other than a pension obtained by the trustee in the form of a Life Office annuity or an allocated pension) will need to obtain an actuarial certificate to qualify under subregulation 1.06 (1) of the Superannuation Industry (Supervision) Regulations (SIS Regulations).

An allocated pension does not need this type of certificate, as it is specifically excluded from these requirements under section (b) of the definition of “defined benefit pension” under subregulation 1.03 (1), as amended by Modification Declaration 23.

Classification as a pension that complies with the requirements of the SIS Regulations affects how the individual receiving the pension is treated under the income and assets tests for Social Security and Age Pension purposes.

If the pension also satisfies the requirements of Regulation 53J of the Income Tax Regulations, the higher pension Reasonable Benefit Limit (RBL) will apply. (Note that these rules mean that allocated pensions do not qualify for asset test exemption or for the pension RBL).

The actuarial certification requirements are covered in the changes made to the SIS Regulations by Modification Declaration 23, together with the Institute of Actuaries’ Guidance Note 465.

For the actuarial certification to include a statement that the actuary believes 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', the Australian Prudential Regulation Authority (APRA) has requested that the Institute of Actuaries of Australia interpret a 'high degree of probability' as a '70% probability' that the fund holds sufficient assets to meet its pension liabilities.

When must certificates be obtained?

This certificate is required every year. APRA may grant a request for 3 yearly certification for larger funds, but will not do so for small funds.

The amount of assets certified may differ

As the purposes for these two types of certificate being obtained are very different, the amount of assets certified as backing the pension liabilities may be different. In general, the assets certified for the purposes of SIS Regulation 9.31 (Adequacy of Assets) are expected to be greater than the assets certified for sections 273A or 283 of the ITAA 1936 (Exemption of Income from Tax).

 

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