4.9.4.40 Actuarial valuation certificate for lifetime or life expectancy ATE income streams paid from SMSFs or SAFs

Summary

This topic is about the requirements for actuarial certificates for lifetime or life expectancy ATE income streams paid from SMSFs or SAFs.

It covers:

• when is an actuarial certificate required to be provided to Services Australia
• when is an actuarial certificate not required
• what are the specific requirements for actuarial certificates
• separate certificate for each ATE income stream
• where an actuarial certificate does not specify high probability or a positive opinion
• where an actuarial certificate is certified outside of the 26-week grace period or provided to Services Australia after the additional 3-week period, and
• debt waiver provision for 100% ATE income streams in SMSFs or SAFs.

When is an actuarial certificate required to be provided to Services Australia

Actuarial certification requirements are applied to lifetime or life expectancy ATE income streams sourced from SMSFs and SAFs. They may also be applied to products from commercial providers where there are concerns that the income stream is being offered on terms that are not standard commercial terms.

APRA imposes reserving standards on institutional providers of income streams so that purchasers can be confident that they will receive the payments specified under the income stream contract, trust deed or governing rules for the product. Reserving standards relate to the fund having sufficient assets to meet pension payments over the life of the product.

These standards, in part, have been incorporated into relevant provisions in Part 9 of the Superannuation Industry (Supervision) Regulations 1994 and Superannuation Prudential Standard 160 - Defined Benefit funds. The standards seek to extend the reserving requirements to lifetime or life expectancy ATE income streams offered from SMSFs or SAFs so that reserving standards are consistent for all providers of lifetime or life expectancy ATE income streams.

Note: These requirements are given legislative backing by relevant provisions in Part 9 of the Superannuation Industry (Supervision) Regulations 1994, and by determinations made by the Secretary of DSS under SSAct section 9A(1B) and section 9B(1D).

An actuarial certificate is required to be provided annually to Services Australia. A grace period of 26 weeks is provided from the start of the financial year so that a new actuarial certificate for the current financial year can be obtained from an actuary. An actuarial assessment for the ATE income stream must be signed off by the actuary within 26 weeks of the end of the 'in force' period (i.e. 29 December each year).

An income support recipient has an additional 3 weeks from the end of the 26 weeks to provide the certificate to Services Australia (i.e. 19 January each year).

Once an income support recipient has provided a new actuarial certificate, the 26-week grace period finishes irrespective of whether or not the certificate specifies a high probability opinion.

When is an actuarial certificate not required

An actuarial certificate is not required:

• for market-linked income streams or account-based income streams
• where a lifetime or life expectancy ATE income stream sourced from an SMSF or SAF is fully backed by a lifetime or life expectancy ATE annuity from a life office. The annuity from the life office must be paid directly to the SMSF or SAF.
  
  • Explanation: This only applies where the income stream purchased from the life office at least covers the payments made to the fund member. If the annuity purchased from the life office does not fully cover the payments specified for the income stream, then an actuarial certificate will still be required.

What are the specific requirements for actuarial certificates?

Where a lifetime or life expectancy ATE income stream is paid from an SMSF or SAF, the income support recipient (or trustee) must provide Services Australia with an actuarial certificate. This certificate indicates whether, at the valuation date, there is a HIGH PROBABILITY, as specified in MD 23 and Amendment of MD 23 that the fund can meet the income stream payments specified under the fund's trust deed or governing rules for the 'in force' period to which the certificate applies.

The 'in force' period is 1 July to 30 June of the year in which certification occurs.

A high probability is the same as giving a 'POSITIVE OPINION' under Institute of Actuaries (IAA) Guidance Note (GN) 465.

An actuarial certificate must be based on the characteristics of the income stream to which it relates. For example, the certificate must be based on the correct assumptions including income support recipient information, purchase price, reversionary beneficiaries (if relevant), indexation rate (where appropriate), etc. Where the actuarial certificate is not based on these characteristics, it is not valid.

Only 1 certificate can be provided for each financial year. If more than 1 certificate is provided for a particular financial year, only the first certificate given will have effect and not any subsequent certificates.

The addition of funds (by, for example, topping up the income stream) or use of funds from outside the income stream (for example, to meet administrative expenses) so as to meet the high probability requirements is not permissible.

It is also not permissible for income payments from these types of income streams to be reduced so as to receive a 'high probability' actuarial opinion.

Separate certificate for each ATE income stream

At commencement, each lifetime or life expectancy ATE income stream must have its own separate actuarial certificate. This also applies where more than 1 lifetime or life expectancy ATE income stream is sourced from the same SMSF or SAF.

For continuing lifetime or life expectancy ATE income streams, it is permissible to issue an actuarial certificate that covers more than 1 income stream, with a separate statement for each income stream. For example, where a person has acquired a lifetime and a life expectancy ATE income stream from their SMSF, or where partners are both receiving a lifetime ATE income stream from their SMSF. However, the actuarial certificate must provide a separate statement for each income stream to clearly differentiate between them.

Where an actuarial certificate does not specify high probability or a positive opinion

This section applies where an actuarial certificate:

• is certificated by the actuary within the 26-week grace period, and
• is provided to Services Australia within 29 weeks of the end of the 'in force' period, and
• does not state a high probability opinion (i.e. the assets backing the income stream are not sufficient for the actuary to provide a positive opinion).

The income support recipient has the following options:

• commute their 50% or 100% ATE income stream and use all of the assets backing the income stream to purchase a new 50% or 100% complying lifetime or life expectancy income stream from a retail provider. For the new income stream to have ATE status a set of conditions must be satisfied (4.9.2.17).
  • Where the income support recipient intends to use this option, they have a 'restructure period' of up to 12 weeks in which to complete the purchase of the new complying income stream from a retail provider.
    Note: The 12-week period may be extended only where a recipient has taken all steps to 'restructure' their ATE income stream within the 12-weeks, but for reasons outside of their control, the new income stream has not commenced within the 12 weeks. The period may be extended by up to 6 weeks (i.e. the maximum period is 18 weeks).
  • The original ATE income stream will retain ATE status while the transfer is being arranged. However if the new complying income stream is not purchased within the 12-week period from a retail provider, the original income stream will permanently lose ATE status and become asset-tested from when the actuarial certificate was provided to Services Australia.
  • Where the 12-week period has expired and the income stream has become an asset-tested income stream (long term), a new income stream purchased from commuting the original income stream cannot regain ATE status. This is because it will not meet the conditions for retention of asset-test exemption as the original income stream has already lost ATE status and is therefore now an asset-tested income stream (long term).
• commute the income stream and use all of the assets backing the income stream to commence an asset-tested market-linked income stream. This product can be commenced either within the SMSF or SAF, or purchased from a retail provider. If the original income stream was a 100% ATE income stream, any debts raised as a result of the non-allowable commutation may be waived (see below).
• continue to receive payments from the now asset-tested income stream.

Note: A non-allowable commutation from a complying income stream may result in a debt being raised (4.9.2.40).

Where an actuarial certificate is certified outside of the 26-week grace period or provided to Services Australia after the additional 3-week period

Where an actuarial certificate is not certified within 26 weeks of the end of the 'in-force' period, or provided to Services Australia within 29 weeks of the end of the 'in-force' period (26 weeks plus additional 3 weeks), the income stream will permanently lose ATE status (i.e. it cannot regain ATE status).

The income support recipient has the following options:

• commute the income stream and use all of the assets backing the income stream to purchase a complying lifetime or life expectancy income stream from a retail provider. The new income stream cannot be treated as an ATE income stream. This is because it will not meet the conditions for retention of asset-test exemption as the original income stream has already lost ATE status and is now an asset-tested income stream. Accordingly, the new income stream will be an asset-tested income stream (long term).
• commute the income stream and use all of the assets backing the income stream to commence an asset-tested market-linked income stream. This product can be commenced either within the SMSF or SAF, or purchased from a retail provider. If the original income stream was a 100% ATE income stream, any debts raised as a result of the non-allowable commutation may be waived (see below).
• continue to receive payments from the now asset-tested income stream.

Note: A non-allowable commutation from a complying income stream may result in a debt being raised (4.9.2.40).

Debt waiver provisions for 100% ATE income streams in SMSFs or SAFs

From 25 August 2011, a debt waiver is available for income support recipients with 100% ATE income streams sourced from SMSFs or SAFs where the income stream is fully commuted and used to purchase an asset-tested market-linked income stream from their SMSF or SAF, or from a retail provider.

A debt will be raised by Services Australia, however it will be waived as per the legislative instrument Social Security (Waiver of Debts - Self Managed Superannuation Funds and Small APRA Funds)(FaHCSIA) Specification 2011.

To satisfy the requirements for the debt waiver, the new asset-tested market-linked income stream purchased from the fully commuted income stream will need to meet the conditions specified in section 9BA (other than the purchase date condition).

Note:

• Under existing rules, income support recipients with 50% ATE income streams can fully commute and rollover their income stream into market-linked income stream and retain 50% asset-test exemption if they meet the conditions for retention of asset-test exemption.
• The waiver is also available to 50% ATE income streams sourced from SMSFs or SAFs where the income stream is fully commuted and used to purchase an asset tested market-linked income stream from their SMSF or SAF, or from a retail provider.
• This relief is not the same as the temporary debt relief that was available in 2009-10. (i.e. whether the income stream meets the high probability requirement is not a condition of the relief).