ATO provides clarity on segregated pension issue

Mr Butler said there had previously been conflicting guidance from the ATO on this point, with some materials suggesting that deemed segregation required a fund to be solely in pension phase for an entire financial year, while other materials suggested that it could apply for part of the financial year.

The ATO has however stated on its website that where an SMSF is paying only a pension prescribed by the superannuation regulations, most commonly an account-based pension, including a TRIS from segregated assets, an actuarial certificate is not required.

“This exemption applies to an SMSF, even where it commences to pay an account-based pension during the year,” Mr Butler said.

“One exception is where the SMSF is also paying pensions not prescribed by the regulations, eg, a life time, flexi or life expectancy pension, where the fund can still have segregated assets but will be required to get an actuarial certificate.”

The ATO’s view was reflected in an addendum to TD 2014/7 and in a fact sheet on it’s website under QC 47029, Mr Butler said. While this ATO position has been available since late 2015, some advisers have relied on other material on the ATO website which suggests a different view applies (such as the information on the ATO’s webpage at QC 21546).

Mr Butler said the ATO has also clarified that where an SMSF is solely in pension phase at any time during a financial year, it will have segregated current pension assets at that time, even if it is for just one day.

While this view doesn’t result in any significant issues for SMSFs that are 100 per cent in pension phase for the entire financial year, it could potentially give rise to considerably more work and cost where an SMSF is in accumulation phase, fullly in pension phase for a period and then partly in pension phase in the same financial year.

“We understand that the ATO legal view differs from current actuarial practice, where actuaries generally treat a fund as being unsegregated for the entire financial year in similar factual situations ,” Mr Butler said.

“This [actuarial] practice avoids considerable cost and work. For example, interim accounts would first need to be prepared for each of the three stages so the actuary could undertake a calculation to determine the exempt proportion after excluding the segregated period.”

Mr Butler said this mismatch between law and practice is unfortunate and may result in unintended consequences.

“Interestingly, if there was a legal dispute on what is the construction of the law here, an actuary would be called as an expert witness on how the law applies in practice.”