Self-managed super funds and tax exemptions on pension assets

I am over 70, but my wife is only 62 and we are both retired. We have a SMSF that commenced in 2005 from which we both draw a pension. Each year I have donated funds to my wife’s super in order to claim the Co-contribution. Apparently this means that the SMSF is in both pension and accumulation phases. We have paid more than $30,000 in tax on the earnings of our super fund because my accountant says that my donations to my wife’s super required a certificate from an Actuary to accompany our super tax return in order to recover this tax. Can you advise whether this is correct please. The cost of the actuarial certificate exceeds the amount of the co-contribution from the Government!!
Regards
John

Response:

Wow!!

Assuming you are running your fund (as most do) using the unsegregated method, your accountant is technically correct. But c’mon – you just do not lodge a return that generates a $30,000+ tax bill. Quite seriously, SMF101 of running a self managed fund in pension phase is to ensure that there is an actuarial certificate (when required), which in turn ensures that you do not have the experience you have endured…your accountant should have been staunch on you getting the certificate before lodging.

If I read this correctly, you have paid the tax…ouch!! If you get a certificate, the return should be able to be amended to get the tax back. If you have not yet lodged, then PLEASE, get the certificate.

Actuaries such as Benzulla will be able to provide such a certificate. Generally, it shouldn’t cost much more than $500 pa but if you have complicated assets, it could cost more and (as mentioned) wipe out the value of any government co-contribution.

Bear in mind that you now have this problem (and need for a certificate) every year because there are accounts in pension phase and accumulation phase.

So here’s the background (and there’s heaps more on this page on the ATO website).

Ordinary income and statutory income that a complying SMF earns from investments to provide for super income stream benefits is exempt from income tax. This is referred to as exempt current pension income (ECPI). If you want to claim a tax exemption on the SMF’s income whilst paying a super income stream benefit, you may need an actuarial certificate.

The ECPI exemption applies to all complying super funds (including SMFs) currently paying super income stream benefits. An SMF paying such a benefit is not automatically entitled to the exemption – they must meet certain other conditions.

In order to claim the ECPI exemption in the SMF annual return, there are steps you must take prior to commencing the payment of the super income stream benefit. These include ensuring that all of the SMF’s assets are re-valued to their current market value prior to commencing payment of the super income stream benefit.

You will not need to obtain an actuarial certificate if:

You want to claim the tax exemption using the segregated assets method, and  At all times that pensions were payable during  the income year, the SMF only paid allocated pensions, market-linked pensions  or account-based pensions, and no other type of pension.

You will need to obtain an actuarial certificate to claim ECPI if:

Your SMSF paid a super income stream benefit  other than an allocated pension, market-linked pension or an account-based pension
The market value of a benefit that is an allocated pension, market-linked pension or account-based pension exceeds the  account balance supporting the benefit, or  Your SMSF is paying an allocated pension,  market-linked pension or account-based pension as well as other types of super  income stream benefits.

SMFs using the unsegregated assets method will need an actuarial certificate for each year they claim ECPI, regardless of the type of super income stream benefit being paid.

Hope this helps…