Asset segregation is an administration process used in the running of super funds, which can provide benefits in some circumstances.
Asset segregation has several different layers to it. A key issue when working out if asset segregation is useful to you, is to decide how many layers you wish to use.
Before implementing asset segregation in your super fund, you need to decide if you’re going to segregate assets at the fund level or at the member level:
(1) Do you want to segregate assets between non-pension (pre-retiree) and pension assets? This often has two primary aims. Firstly, you might want a different investment strategy between non-pension and pension member interests. Secondly, you might want to engage in some tax planning because your fund pays no tax on the gains made if the assets are supporting pensions.
An example of the first purpose might be helpful – the Fitzpatrick Super Fund has four members: Jim Fitzpatrick and his wife Lyn, as well as their two children, Maryann and Frank. Jim and Lyn currently receive transition to retirement pensions. The children are both under 30.
The trustees believe that they need two different investment strategies because of the wide difference in ages of the fund’s members.
A practical problem with this decision is that the Federal Government’s super legislation demands that fund trustees put in place an investment strategy for the fund. That is one investment strategy, not several.
The key to documenting these different strategies in one document is to note the different member ages and their different requirements. For example, “to provide the fund’s younger members with sufficient retirement income, the trustees will focus on capital growth and reinvesting investment income; for our pensioner members, the trustees will focus on earning investment income, which will then be distributed to the members and pension income payments”.
(2) Do you want to segregate assets between specific members? For example, one of your fund’s members is particularly attracted to a specific asset that the fund owns. Within SMSFs, splitting assets might occur if a fund has two non-relative members or has a spousal couple going through a separation, and one of them would like to keep specific assets in their super fund after the spousal finances have been officially split.
What does asset segregation involve?
It involves the keeping of appropriate fund records – especially financial accounts – by noting specific assets belong to a certain type of member (eg all non-pension members) or to a particular member.
Effectively, your accountant will use different General Ledger accounts for your different asset segregation policies. There is no need for identification on property titles or the ASX Chess system or bank accounts or any other assets.
Once that General Ledger identification has taken place, then all income and gains from these assets has to be allocated accordingly.
This isn’t a complex process, but depending on how many assets you own in your different strategies (especially the same assets) it can be a pain in the neck making sure income has been allocated to the right General Ledger account. (The job of your annual external audit is to make sure this work has been completed correctly.)
Can be costly
Administering asset segregation in SMSFs is more expensive because there is more work to be done. In some cases, auditors will charge more to check the accounts of an SMSF with segregated accounts, because they need to confirm that all money has flowed to where it needs to be.
These higher costs partly explain why most SMSFs don’t use it. But also many SMSFs don’t use asset segregation because it doesn’t have any practical benefit for their fund.
What does your trust deed say?
What rules in your trust deed govern how you can segregate your super fund assets? You must answer this question before embarking on this process.
If you plan to change your trust deed and you use asset segregation, then you should make sure that the new deed you purchase won’t interfere with how you run and manage your asset segregation.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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