Changes to actuarial certificate requirements for SMSFs paying a pension

Commencing a pension from an SMSF can be easy process provided it is done the right way and you follow the rules that apply. 

Once a pension has commenced from a SMSF, ongoing administration, such as obtaining an actuarial certificate, may be required to determine how much of the pension's investment income will be exempt from income tax. This is also referred to as exempt current pension income (ECPI).  

Due to recent legislative changes, SMSF trustees no longer need to obtain an actuarial certificate when calculating ECPI where all members of the fund are solely in retirement phase for the entire financial year.

The changes will start from 2021-2022 and later financial years.

Background 
As a general rule, if all member accounts in an SMSF are retirement phase pensions, all of the funds investment income is ECPI (ie, 100% exempt). However, if an SMSF has both accumulation accounts and retirement phase pensions, then only part of the funds investment income is ECPI.

Prior to 1 July 2021, SMSFs that were fully in retirement phase with 'disregarded small fund assets' (DSFA) were required to obtain an actuarial certificate to claim ECPI even though all of their members were fully in retirement phase for the entire income year and the pension income is 100% exempt.

To recap, an SMSF is regarded as having DSFA where the fund:

• pays a retirement phase pension at any time during the financial year, and
  
• a fund member has a total superannuation balance (TSB) of $1.6 million or more on 30 June of the previous financial year, and 
  
• the same member is receiving a retirement pension from any fund (not necessarily the SMSF).
  

The changes
The law has been amended to remove the requirement to obtain an actuarial certificate where: 

• the fund is regarded as having DSFA, and 
  
• all members are solely in the retirement phase for the whole financial year.
  

This means that SMSFs that are fully in retirement phase and only paying pensions will not be required to obtain an actuarial certificate for their 2022 SMSF annual return. The new law reduces costs and removes unnecessary red tape for affected funds by removing this requirement. 

Example
James: SMSF is 100% in retirement phase from 1/7/2021 � 30/6/2022. 

As at 30/6/2021, James TSB was $1.8 million. This is made up of a $1.2 million account-based pension and a $600,000 reversionary pension that reverted to him from his late wife.

James: SMSF would have DSFA but it is solely in retirement phase for all of 2021-22. 

The changes mean James SMSF will not be covered by the DSFA rule and there is no need to obtain an actuarial certificate. James claims all income and net capital gains earned in 2021-22 as ECPI (100% exempt). 

Point to note
An actuarial certificate will still be required for SMSFs where it is possible that at any time during the financial year, assets and earnings are greater than the estimated liabilities, even if all members are fully in retirement phase. This is commonly seen in legacy (non-account based) pension