How to segregate assets in an SMSF

SMSF technical expert and columnist for The Australian newspaper
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Segregating assets is a strategy that can work for certain kind of SMSFs with trustees at different stages. Previously, we discussed the strategy in brief and this week we more closely examine the process.

Is there a specific process for segregating assets for an SMSF that has been established?

The short answer is no – the process you follow very much depends on the requirements of your trust deed and the assets your super fund owns.

Here I’ll give you some useful information on how this process is typically completed.

Review your trust deed and follow what it requires

Your ability to segregate assets in your super fund will be governed by the powers given to you in your fund’s trust deed. This must be a positive power, as there is no power in the super laws that allow super fund trustees to segregate assets. Therefore, if your trust deed doesn’t mention asset segregation, then you can’t implement it.

Review you fund’s asset register

Before you begin segregating your super fund’s assets, you need to carefully review your fund’s asset register. Does your fund own a large indivisible asset or are all assets easily split into separate parts?

The best way to understand the asset review process is to look at some examples.

Example 1: An SMSF has three members whose account balances are worth $1,000,000, $100,000 and $250,000. The members with the $1 million and $100,000 account balances are retiring.

The fund owns a residential property valued at $1.2 million. The property is on one title.

In this case, asset segregation is very difficult – if not impossible – if the retired members want that property in their part of the fund, because it is worth more than their combined account balances.

It’s not possible to segregate fund assets if those assets can’t be split into separate identifiable parts. Real estate and term deposits are good examples of this.

Example 2: Let’s change the first example and say that the retiring members have $1.25 million in the fund and the non-retiring member has $100,000.

In this case, asset segregation can take place with the pension part of the fund taking the residential property and $50,000 left to provide some short-term liquidity. (As these pensioners age and their minimum pension increases, then a practical problem they will face in future years is paying these pensions, if the property isn’t delivering sufficient liquidity.)

The non-retiring member would then be free to take the balance of the assets in the fund.

How do you handle the situation of the non-retiring member who likes the property and would like that asset as part of their retirement assets? All super fund trustees need to act in the best interests of members and, in my view, it would be unwise, in this instance, for the retiring members to ignore the wishes of the other member. Ideally SMSF trustees will make unanimous decisions.

Example 3: Your SMSF owns shares, managed funds and cash at bank.

If you intend to have the same assets in different segregated segments, then it’s often easier to split these types of assets into specific parcels because your investments are based around unit and share prices.

Ideally, you will be able to split the managed funds and shares into specific parcels so that it’s easier for you to manage the assets and correctly record allocation of income and expenses. If before asset segregation you have one holding for a particular managed fund, which is going to be held by different segregated segments, it’s probably a good idea to create specific holdings for the type of segregation you want to implement.

You will want to record the changes you make in your fund’s asset register.

Separate bank accounts

Later this year, the Tax Office will be releasing a Tax Determination about the need for super funds using segregated assets to use separate bank accounts.

Personally I think it’s easier to use separate bank accounts when using segregated assets. At present, it’s not essential (unless your trust deed demands it) but it makes your administrative and accounting work simpler.

Moving assets between different segments

Suppose your non-pension members have an asset in their portfolio that has a large capital gain and you’ve decided the asset needs to be sold. Can you move that asset to your pension members and sell the asset CGT free?

There are no hard and fast rules here. However, you should be aware that income tax anti-avoidance rules – and their associated penalties – might be applied if you try to be too cute. You should, at the very least, consider taking advice from your accountant or someone who specialises in tax law before taking action.

Ask for assistance

Finally, if you want to know more about asset segregation and how it might work in your fund, I suggest you chat to your fund administrator.

In most cases, they will be able to provide you with some good assistance and guidance. They will ensure all your assets are correctly recorded.

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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