Here is some insight into what happens under the bonnet when an actuary prepares a certificate for SMSF's...
Every actuary will make assumptions. The more assumptions made - the easier life is for the actuary, and the more approximate the calculations. In theory, these approximations can work either for or against the fund. However in practice they usually work against the fund. The difference can be thousands of dollars in tax. Let's take an example.
Most actuaries start with the assumption that transactions take place in the middle of the year - say on the 31st of December. In reality, pensions are usually commenced earlier (often on the 1st of July), and contributions are usually made later in the year (often in June).
Let's take, for example, a fund with a balance of $500,000 in accumulation at the start of the year. A pension is commenced on 1 July, and investment income of $50,000 is received during the year. If your actuary approximates, your fund will pay $3,750 in tax. If your actuary uses more accurate calculations, then you won't pay any tax. That's $4,000 in unnecessary tax! Similarly, an accurate calculation will result in less tax where contributions are made late in the year.
What approximations is your actuary making? And how much is it costing your clients?
Greg Einfeld has over 20 years’ experience in the Australian Superannuation and Financial Services industry. He has MEc and MBA degrees, is a licensed financial adviser, a qualified actuary, and specialises in Self Managed Super Funds (SMSF’s). He regularly presents on a variety of SMSF topics including investment, tax, estate planning, pensions, administration and strategies.