When Does an SMSF Really Need an Actuarial Certificate?

For an SMSF that does not pay defined benefit pensions, an actuarial certificate is generally only required when the fund’s assets support both accumulation interests and retirement phase pensions at the same time during the financial year.

In practice, many funds appear to meet this condition — but on closer examination, they don’t.

Most SMSFs paying retirement phase pensions obtain an actuarial certificate so they can claim a tax exemption on some or all of their investment income, referred to as exempt current pension income (ECPI). However, there are several common scenarios where a fund can still claim ECPI without obtaining an actuarial certificate.

The most common examples include situations where:

• the fund is 100% in retirement phase for the entire year, or

• the fund briefly appears to have accumulation interests, but in substance never does, or

• the fund is only wholly in pension phase for part of the year and is eligible to segregate assets.

Each of these scenarios is explored below.

Scope note: This article deals exclusively with account‑based pensions and market‑linked pensions in retirement phase. Where a defined benefit pension is involved, the analysis changes completely — an actuarial certificate is always required and is compulsory. Similarly, funds paying only transition‑to‑retirement income streams do not require actuarial certificates because those pensions are not eligible for ECPI.

It’s also important to emphasise that, for SMSFs that do not pay defined benefit pensions, an actuarial certificate is never a compliance requirement. It is purely a tax calculation tool. Trustees only need one if they wish to claim ECPI and require actuarial support to do so.

Trustees always retain the option of not claiming ECPI at all. In some cases — particularly where the exempt amount would be immaterial — this can be a sensible and cost‑effective decision. If no ECPI is claimed, no actuarial certificate is required, regardless of how the fund’s accounts are structured (provided no defined benefit pensions are paid).

Contributions Used to Commence a Pension on the Same Day

Consider an SMSF that commences the financial year wholly in retirement phase. During the year, a member makes a contribution and, on the same day, the contribution (net of contributions tax) is used to commence a new retirement phase pension.

From a strictly technical perspective, the fund briefly held accumulation interests and would therefore appear to require an actuarial certificate.

However, this is not how actuaries approach the situation in practice.

Where the contribution and the pension commencement occur on the same date, most actuaries — including WE SMSF — treat the transactions as occurring simultaneously. In substance, the fund never supports accumulation interests.

As a result:

• the fund is treated as being 100% in retirement phase for the entire year,

• all investment income remains eligible for ECPI, and

• no actuarial certificate is required.

This outcome is highly favourable but is entirely dependent on timing. If the contribution remained in accumulation — even overnight — the fund would no longer meet this condition and an actuarial certificate would generally be required.

Entire Accumulation Balance Rolled to Pension on 1 July

A similar outcome arises where a fund starts the year with accumulation interests and the trustee uses the entire balance to commence pensions on 1 July.

In these cases, it is generally accepted that the pensions commence at the start of the day on 1 July, meaning there is no point during the financial year when the fund’s assets support accumulation interests.

Accordingly:

• the fund is treated as being 100% in retirement phase for the whole year,

• all investment income is fully exempt from tax, and

• no actuarial certificate is required.

Part‑Year Pension Phase — Where Asset Segregation Is Permitted

This outcome only applies to funds that are permitted to segregate assets for ECPI purposes.

Where segregation is available, a fund can avoid obtaining an actuarial certificate even if it is only wholly in retirement phase for part of the year, provided that at no point during the year does the fund have both accumulation and pension interests simultaneously.

Funds that meet this condition:

• may claim ECPI on investment income derived during the period they are 100% in retirement phase, and

• do not require an actuarial certificate to do so.

Some of these funds voluntarily segregate specific assets to support pension liabilities. Those arrangements introduce additional complexity and are outside the scope of this article, although in some cases actuarial certificates are still not required.

So, When Is an Actuarial Certificate Actually Required?

The core principle is simple:

For an SMSF that does not pay defined benefit pensions, an actuarial certificate is only required if the fund’s assets support a mix of accumulation and retirement phase pensions at any point during the financial year.

If, for the entire year, every dollar in the fund supports retirement phase pensions, an actuarial certificate is unnecessary and all investment income is exempt from tax.

The Impact of Division 296

The proposed Division 296 tax may materially change this landscape. If implemented in line with the current draft legislation, a new form of actuarial certificate will be required to determine the allocation of “earnings” to individual members subject to the tax.

Under this framework, actuarial certificates may be required for multi‑member funds where at least one member has a total superannuation balance exceeding $3 million, even if all balances remain in accumulation phase.

If this raises questions or you’d like to work through the nuances in the context of a specific fund, I’m happy to help. Please reach out to me at WE SMSF by clicking the link..