Segregation of pension and non-pension assets is an important issue for all SMSFs that pay pensions.
Asset segregation can have some useful benefits but only in certain circumstances. In the majority of cases, segregation serves no practical purpose. Over the coming years, this may change as different and much longer work patterns become more widespread.
The Tax Office has just released a Tax Determination on when a bank account will be considered to be a separate asset and hence satisfy the requirement for asset segregation purposes, so that your pension assets will remain tax-free.
It notes that some banks – and similar institutions – offer accounts that contain “sub-accounts”. You can use a single bank account and place all pension transactions into one sub-account, even if other sub-accounts aren’t used to pay pensions.
In other words, these sub-accounts are seen as bank accounts in their own right (however they might not have a separate bank account number).
The end result here is that you can have segregated pension assets but do not need to have separate bank accounts, as long as your bank has the right sort of service. This will help to keep your costs lower.
You can achieve a similar result using your fund’s accounting software.
When using a single bank account that contains sub-accounts, your super fund will sometimes receive income that needs to be shared between the various sub-accounts. (A good example is the interest earned on the bank account’s deposits.)
The correct amount of this income needs to be allocated to each sub-account. The ATO says this re-allocation needs to occur within a “reasonable time”.
All the examples in the Tax Determination point to action being taken promptly to allocate expenses or split income appropriately or fix errors quite quickly.
Although not explicitly defined, it would seem that the ATO doesn’t want you to muck around and forget. The larger the amount, the sooner it would need to be corrected.
Incorrect allocations to sub-accounts
In a similar way to income being allocated to various sub-accounts, incorrect allocations need to be adjusted. Again, this must occur within a “reasonable time.”
A good example of this is super contributions being accidentally allocated to a “pension sub-account”.
When this occurs, the contribution might earn interest whilst in the pension sub-account. Both the contribution and the relevant interest earned (and potentially associated costs) need to be moved from that sub-account to the non-pension sub-account.
The use of a single bank account with sub-accounts will see various expenses having to be paid that are shared by the various sub-accounts. For example, financial accounting fees, ATO regulatory fees and audit fees.
Again, the appropriate portion of an expense must be allocated to each sub-account within a reasonable time.
Sub-accounts in your fund’s accounting software
As noted, you can use your fund’s accounting software to create appropriate sub-accounts. This can be more complicated because your fund’s administrators and bookkeepers would need to work out which income and expenses need to be allocated.
Most large funds would use this approach because they have highly detailed accounting and administration software. They also have a large team of people allocating money and transactions correctly to each particular member and investment option. I’m not convinced this would be an efficient approach for SMSFs, especially given the small number of transactions that typically occur.
I would expect using a bank’s sub-accounts infrastructure would provide a more accurate and cost effective solution for SMSFs.
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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