SMSFs and Small APRA Funds must act quickly or lose asset tax exemptions

Time is running out for SMSFs and Small APRA Funds to make moves to retain their asset tax exemption status, writes Alex Durham.

Self-managed superannuation funds (SMSFs) and Small APRA Funds (SAFs) running 100 per cent Asset Test Exempt (ATE) defined benefit pensions had until the end of December to obtain a certificate from an actuary for the 2008-09 year providing a "high probability" that the fund can meet the income stream payments specified under the fund’s trust deed or governing rules.

If a fund failed to provide such a certificate by the end of December, the pension can permanently lose its ATE status.

In the past, losing ATE status would also have resulted in a debt penalty being applied as though the income stream had never been ATE, however in 2009 Jenny Macklin, the Minister for Families, Housing, Community Services and Indigenous Affairs, provided temporary relief from this debt.

The relief applies to recipients of 100 per cent ATE income streams who are unable to provide an actuarial certificate specifying a "high probability" opinion.

This means that SMSFs and SAFs that fail the high probability requirements can continue to pay the pension as required by the governing rules until it runs out and Centrelink will permanently assess it as an asset — but will not impose a debt penalty.

More recently, further relief was provided. SMSFs that provided a certificate to Centrelink by December 31 that did not state a high probability may roll over or restructure the pension into a market-linked income stream, commonly known as a Term Allocated Pension (TAP).

The new TAP will be 100 per cent asset tested, and will remain non-commutable. Effectively, a new income stream has been born: a fully asset-tested TAP.

More recently again, this relief was extended to SAFs effective 5 February 2010.

Note that the relief in all instances is until June 30, 2010, so it relates to the 2008-09 and 2009-10 actuarial certificate reviews.

Keeping the Asset Test Exemption

The relief is good news for those running pre September 20, 2004, 100 per cent ATE pensions out of their SMSF or SAF. But there is still only one way to retain the asset test exemption when the pension has become insolvent, and that is to roll over to a complying annuity provided by a Life Office.

The income recipient has 12 weeks from the date of the certificate to implement the rollover to retain the asset test exemption. So if the fund obtained the certificate in December, it has until March to make the rollover.

The annuity must follow the rules in place in September 2007 for complying income streams, including:

• The term must range between life expectancy and the number of whole years to age 100.
• If reversionary partner selected, the term must be between the annuitant’s current life expectancy and the number of whole years to age 100; or if the reversionary partner’s life expectancy is longer than the annuitant, between the reversionary partner’s life expectancy and the number of whole year until the reversionary partner turns 100.
• No residual capital value.
• Income payments can be increased each year by a maximum of CPI +1 per cent or up to 5 per cent, whichever is greater.
• The annuity is non-commutable except in limited circumstances.
• Note that the rollover to the annuity is a new income stream, not a continuation of the old one, so the term is set according to the age at commencement of the annuity.

Alex Denham is the head of technical services at Challenger.