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Heffron highlights benefits of segregating accumulation assets

meg heffron web
By Miranda Brownlee
06 February 2023 — 3 minute read

Segregating assets to support accumulation accounts can be a valuable strategy for some SMSF clients, a technical expert has explained.

In an online article, Heffron managing director Meg Heffron explained that when the term segregation is used, it is generally referring to a tax concept which involves setting aside assets to provide retirement phase pensions.  

“In a nutshell, if a fund has assets that are purely supporting one or more retirement phase pension accounts and those assets are classified as segregated for tax purposes, the fund claims a tax exemption for all investment income earned on those assets,” she explained.

“Providing the fund doesn’t have any defined benefit pensions, it doesn’t even need an actuarial certificate to claim this tax exemption.”

However, Ms Heffron noted that the Income Tax Assessment Act 1997 also allows trustees to set aside assets exclusively for precisely the opposite purpose — to support accumulation benefits.

“Providing the fund is allowed to have segregated assets, assets set aside in this way can be treated as segregated non-current assets.”

Earnings on segregated non-current assets are subject to the usual tax rate of 15 per cent, she noted.

For some funds, segregating accumulation assets can be beneficial, she explained.

She gave an example of a fund with two members, both of whom have $1 million accumulation balances at the beginning of the year.

On 1 January, one of the members starts a retirement phase pension while the other remains in accumulation phase.

“In the normal course of events, this fund would obtain an actuarial certificate for the whole year. It is likely that this certificate would show a percentage of approximately 25 per cent. In other words, 25 per cent of all of the investment income received throughout the whole year would be exempt from tax.”

“This would apply to income before any pensions started (when the fund was actually 100 per cent in accumulation phase), as well as all income after the pension started (when the fund was actually 50 per cent in pension phase).

“If the fund is making roughly the same amount of investment income every month, this will give a result that feels about right.”

However, where things might become more complicated is if the fund sells a major asset such as property in June.

“[As] it occurred at a time when the fund had around 50 per cent of its assets supporting pension accounts, the trustee could be forgiven for assuming that 50 per cent of the capital gains (after discounts) will be exempt from tax.”

“This is where the ability to segregate an asset to support an accumulation account can be vital.”

Since the fund is allowed to segregate its assets for tax purposes, the trustee can elect to treat all its assets as segregated accumulation assets at 1 July until the pension starts on 1 January.

“This particular election is one that must be made in advance, before the assets become segregated,” she noted.

“In this case, that’s on or before 1 July — the trustee couldn’t leave it until later in the year when they realise they won’t get the tax result they hoped for without the segregation.”

By electing to treat all the assets as segregated accumulation assets, Ms Heffron said this means that the account balances for the first half of the year are completely ignored in working out the actuarial percentage.

This means that the actuarial percentage will therefore be higher, in this case around 50 per cent, she explained.

“The percentage is applied to all income after 1 January (all income before that time would be fully taxable),” she said.

“In this case, it means that 50 per cent of the capital gain (after discounts) would be exempt from tax rather than only 25 per cent.”

Ms Heffron reminded SMSF professionals that an SMSF is only allowed to have segregated assets if, at the end of the previous year, no fund member had both:

  • A total superannuation balance of more than $1.6m, and
  • A retirement phase pension (in this fund or any other).

“If a fund is allowed to segregate, the trustee is allowed to have either segregated pension assets or segregated accumulation assets or both,” she stated.

The process for segregating assets for accumulation accounts is essentially the same as choosing to segregate specific assets for pension accounts, she said.

“The trustee resolves to do so, records the assets that should be treated as segregated assets and ensures that they are kept separate from other assets.”

“There is one important difference in that funds segregating assets for accumulation accounts must obtain an actuarial certificate. This is different to the situation for funds that are segregating assets for retirement phase pension accounts — this can be done without an actuarial certificate as long as the fund has no defined benefit pensions.”


Heffron highlights benefits of segregating accumulation assets
meg heffron web
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