Treasury set to consult on actuarial certificate reform

Treasury confirmed to SMSF Adviser that funds that have defined benefit interests and other non-account based income streams will still be required to get actuarial certificates.

“As a result of the introduction of the transfer balance cap, members will not be able to use the segregated assets method to calculate earnings tax exemptions, where one or more members have a superannuation interest in the retirement phase and a total superannuation balance of over $1.6 million. This measure was introduced to balance the integrity of the superannuation reform package while maintaining the flexibility for trustees to operate their funds and manage funds’ compliance costs,” it said.

“One implication of this measure is that SMSFs which previously used the segregated assets method will now be required to use the proportional method. This method currently requires trustees to obtain an actuarial certificate when completing their annual returns.

“To reduce the compliance cost to funds from this measure, the government has proposed a regulation will be made that means funds who use the proportionate method but whose only superannuation income stream benefit liabilities arise from account-based superannuation income stream products will not be required to obtain an actuary’s certificate for the purpose of determining their exempt current pension income.”

The government intends to release this regulation for consultation before Christmas for around six weeks, where the industry is invited to comment on the changes.

Heffron SMSF Solutions head of customer Meg Heffron noted Treasury is not removing the need for the calculation, the need for an actuary to sign it.

“Someone will still have to do it, it just won’t need to be an actuary,” she explained.

“Treasury’s argument is that should take costs out of the system because actuaries are expensive and there aren’t very many of them. The counter argument is someone is still going to be doing the calculations so either accountants will do it and not get paid for it or accountants will do it and they will get paid for it, in which case the cost doesn’t really change.”

Key figures in the SMSF sector have voiced strong opposition to the proposal and are encouraging action from industry stakeholders as the government mulls the changes.

The SMSF Academy’s Aaron Dunn said if the requirement to obtain these certificates is removed for certain funds, there will be a greater onus on whoever is preparing that information.

“Auditors will then have to take a greater level of involvement in signing off on it as part of the financial audit to ensure that the calculation is being done correctly as well,” Mr Dunn said.

PwC director of private clients Liz Westover said she does not support this intention by Treasury, stating that actuarial certificates add to the integrity of the SMSF sector.

“Given the changes that are coming through, the fact that larger fund balances won’t be able to segregate assets that you’re now going to have more SMSFs with a blend of pension and accumulation accounts, I would have thought that the need for actuarial certificates was greater than it ever has been,” Ms Westover said.

“I think they have a very strong place as an independent source given that ECPI or exempt current pension income is the single largest deduction for SMSFs.”

The reduction of integrity in the sector as a result of these proposed changes is of paramount concern to Act2 Solutions director Andy O’Meagher.

“I definitely approve of the idea of removing the need for an actuarial certificate if the fund is entirely in pension phase for the whole year, assuming they are an account-based pensions of course,” Mr O’Meagher said.

“We receive hundreds of phone calls and emails every week from accountants and administrators asking for clarification or seeking advice or assistance with SMSF legislation and SMSF circumstances. They reach to actuarial certificate providers to lend a helping hand.

“If they no longer need an actuarial certificate, then that extra level of professional assistance and knowledge is removed from the pool of the SMSF knowledge and professionalism,” he said.

Accurium’s chief executive Tracy Williams has similar concerns and is sceptical of whether the proposals will eventuate.

“We support industry consultation to rectify anomalies that have arisen as a result of changes in new superannuation rules. However, it seems unlikely that oversight of the SMSF sector through actuarial certificates would be reduced at a time of major changes in superannuation rules. Indeed, there are no clear benefits for trustees from this as the tax-exempt percentage would still need to be calculated by the trustee,” Ms Williams said.

Estimates provided by the ATO to SMSF Adviser, based on 2014 SMSF annual returns, show around 61 per cent of all SMSFs in pension phase currently use the unsegregated method. This includes those funds in both full and partial pension phase.

The ATO’s SMSF annual statistical overview for 2013-14 indicates that 11.3 per cent of all SMSFs are in partial pension praise (i.e. they comprise both accumulation and pension accounts).