segregation strategies in an smsf - accurium · smsf the information in this presentation has been...

Segregation strategies in an SMSF

The information in this presentation has been prepared by Accurium Pty Ltd ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

What is elected segregation

How does the fund claim ECPI with segregated assets

Case study of elected segregation

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Agenda

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Elected segregation

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Assets solely supporting retirement phase liabilities

Claim ECPI using the segregated method in Section 295.385 of ITAA 1997

- Don’t need an actuarial certificate

- Income on segregated pension assets is ECPI (100% exempt)

- Capital gains and losses are disregarded and not included in assessable income

- General expenses are not deductible as incurred on assets producing exempt income

Segregated pension assets

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Must not have disregarded small fund assets to segregate for tax purposes

Electing for an asset or pool of assets to support a retirement phase income stream

Cannot segregate part of an asset

May need notional sub-accounts where asset earns income to maintain segregation

Elected segregation needs to be done in advance, cannot do in arrears

Elected segregation

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Annual assessment each 30 June for how a fund must claim ECPI in the next year

- Also applies in first year of the SMSF

SMSF will have disregarded small fund assets for the next financial year if:

- At 30 June a member was in retirement phase and had over $1.6m total super balance

- In next financial year the SMSF has a member in retirement phase at any time

If have disregarded small fund assets the fund is not eligible to use the segregated method for tax purposes and

must claim ECPI using the proportionate method.

- Actuarial certificate is required to claim ECPI

Disregarded small fund assets

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Document in the Fund’s investment strategy

- Implications for member risk profiles

- Liquidity considerations to meet minimum pension standards

- Think about impact on future capital gains and losses

- Can stop and start segregation as circumstances change over time

Can elect to employ a full segregation or partial (hybrid) segregation strategy

Elected segregation documentation

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Jack has retired and commenced an ABP

Considering use of elected segregation

- Fund does not have disregarded small fund assets

Good Life Super Fund: full segregation

Pool of assets worth $1,300,000

Jack ABP $850,000 Marilyn Accumulation $450,500

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Elect to segregate exactly $850,000 of fund assets at 1 July 2019 to Jack’s ABP

- Document as part of fund investment strategy what assets are segregated

- Make sure have segregated enough liquid assets to meet ongoing pension requirements

- Maintain notional sub accounts on shared bank account

- Income and expenses relating to the segregated assets will be allocated to Jack’s ABP

- Income and expenses relating to the other assets will be allocated to Marilyn’s account

Good Life Super Fund: full segregation

Specific assets currently worth exactly $850,000 All other assets


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Segregated assets income: $44,500Net capital gain: $0

Distinct general expenses: $1,500

Concessional contribution: $25,000Other assets income: $3,515

Net capital gain: $10,000Distinct expenses: $400

Jack ABP Marilyn Accumulation

Deductible expenses: $1,600General expenses that are not distinct and severable: $3,000

Good Life Super Fund 2018-19

Marilyn’s assets are not ‘segregated’, and with no retirement phase account all income and net capital gains are assessable

ECPI = assessable income earned on Jack’s segregated ABP assets

Annual return will have

- ECPI = $44,500

- Assessable income = $13,515

- Assessable contributions = $25,000

Good Life Super Fund 2019-20 ECPI

Segregated assets income: $44,500Net capital gain: $0

Concessional contribution: $25,000Other assets income: $3,515

Net capital gain: $10,000


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Good Life Super Fund 2018-19

The trustees decide to use the TR 93/17 formula for determining deductibility of expenses that are not

distinct and severable:

- Assessable income / total income = 38,515 / (38,515 + 44,500) = 46.395%

- Total deductions = 1,600 + 400 + 0.46395 x 3,000 = $3,392

- Total non-deductible expenses = 1,500 + 0.53605 x 3,000 = $3,108

Distinct general expenses: $1,500 Distinct expenses: $400


Deductible expenses: $1,600General expenses that are not distinct and severable: $3,000

Good Life Super Fund: partial segregation

Elected segregation of a property valued at $812,000 & new bank account

SMSF assets except for the property, mostly defensive assets

SMSF assets: balanced investment mix


Defensive risk profileGrowth risk profile


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Jack pays minimum pension payment of $34,000…

Jack now only has $4,000 in assets that are not elected as segregated = liquidity issues


Marilyn Accumulation $450,500



Jack ABP $850,000




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SMSF assets: balanced investment mix

Jack takes lump sum payment of $15,000…

Segregated asset value exceeds account to which attributed – no longer segregated


Marilyn Accumulation $450,500



Jack ABP $816,000


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Let’s consider Jack & Marilyn did segregate a property to Jack’s ABP at 1 July 2019

- Segregation documented in the fund investment strategy and separate bank account set up for the property (also segregated)

ECPI in 2019-20 = segregated method ECPI + proportionate method ECPI

- Segregated method ECPI = income on segregated property and bank account

- Proportionate method ECPI = exempt income proportion x income on all other assets

Good Life Super Fund ECPI calculation

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Jack’s segregated property

Actuarial certificate for income on unsegregated assets applies over full income year

7.492% exempt income proportion


Jack’s unsegregated pension balance

Marilyn’s accumulation

interest

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Segregated income: $42,500Distinct expenses $1,500

Assessable income: $15,515


Deductible expenses $600General expenses $3,400

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Good Life Super Fund ECPI 2019-20

Segregated method ECPI = $42,500

Proportionate method ECPI = 0.07482 x 15,515 = $1,160.83

ECPI = 42,500 + 1,160.83 = $43,661

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Good Life Super Fund expenses

Total deductions = 600 + (deductible proportion x 3,400)

- 1 – exempt income proportion = 1 – 0.07482 = 92.518%

- Actuarial calculation does not include segregated assets and so overstates a fair and reasonable deduction, 92.518% of all fund assets are not producing assessable income

Need to allow for all fund liabilities, including segregated assets…

Good Life Super Fund expenses

Jack and Marilyn obtain an Accurium actuarial certificate and also request for us to provide them with the expense deductibility proportion allowing for all fund liabilities.

- Expense deductibility proportion = 34.727%

- This identifies that 34.727% of all fund liabilities on average were non-retirement phase liabilities producing assessable income

- Total deductions = 600 + (0.34727 x 3,400) = $1,780.72

- Non-deductible expenses = 1,500 + (0.65273 x 3,400) = $3,719.28

Elected segregation can only be used where the fund does NOT have disregarded small fund assets (can still segregate for investment purposes) and must be documented

Beware of liquidity issues and understand impact on member risk profiles

A net capital gain or loss on segregated assets will be disregarded = 100% exempt

Claim ECPI using

- both segregated and proportionate method if use partial segregation

- segregated method if employ full segregation

A fund that has elected segregation

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Segregating for investment purposes

Claim ECPI as if fund was unsegregated

- Income earned on assets segregated for investment purpose is not segregated current pension income for tax purposes

Allocate investment earnings and expenses in line with documented segregation

- Can segregate to accumulation, or pension, or a mix of accounts

- E.g. member segregation

Can segregate in this way even if have disregarded small fund assets

Segregating for investment purposes

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Bob is 64 (65 in May 20) and his wife Jane is 63 and they have an SMSF with the following and no other superannuation accounts:

Case study - business real property asset sale

SMSF asset 1 July 2019 market values

Consulting rooms $1,000,000 (cost $700,000)

Cash & shares $500,000

Total value $1,500,000

SMSF member 1 July 2019 balance in accumulation

Bob $1,200,000

Jane $300,000

Total value $1,500,000

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2019-20 annual return

- Started an income stream for Bob at 1 June 2020 with 100% of his balance

- No pension payments required since income stream started in June

- Bob received $20,000 in concessional contributions

- Jane received $10,000 in concessional contributions

How will this fund claim ECPI and how will the income and capital gains be taxed?

- $65,000 in income received in 2019-20

- Consulting rooms segregated to Bob

Case study – business real property asset sale

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Bob & Jane’s SMSF 2019-20

Bob & Jane’s

accumulation balances

Consulting rooms segregated for investment purposes to Bob

Bob commences ABP 1 June

Claim ECPI using the proportionate method 6.595% exempt

Income $65,000 Consulting rooms

$45,000 Shares and cash

$20,000

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- No elected segregation for tax purposes

- ECPI = 65,000 x 0.06595 = 4,286.75

In allocating investment income to each member’s account at year end take account of the assets

segregated for investment purposes

- 45,000 in income on consulting rooms was allocated to Bob

- Around 2/5 of the income on shares/cash is allocated to Bob

- Around 3/5 of the income on shares/cash is allocated to Jane

2020-21 income year

- Bob has $1,270,000 in an ABP with consulting rooms segregated to his account for investment purposes

- Jane has $320,000 in accumulation and is still working

- Looking to sell the consulting rooms


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Jane’s accumulation balance

Bob’s pension balance


Claim ECPI using the proportionate method 79.245% exempt

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Bob’s pension balance Claim ECPI using the proportionate method 79.245% exempt

Sold 1 Sept for $1m

Capital gain $300k


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May claim ECPI using both methods

- Income on segregated pension assets for tax purposes 100% exempt

- Income on unsegregated assets has actuarial exempt income proportion apply

Document segregated pension asset strategy

- Cannot segregate part of an asset to a pension

- Ensure have sufficient liquidity to meet pension payments

Allocate investment earnings and expenses in line with documented segregation

Cannot segregate in this way if have disregarded small fund assets

Segregating for tax purposes

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- Started an income stream for Bob at 1 June 2020 with 100% of his balance

- Document that consulting rooms will be a segregated pension asset for Bob

- No pension payments required since income stream started in June

- Bob received $20,000 in concessional contributions

- Jane received $10,000 in concessional contributions

How will this fund claim ECPI and how will the income and capital gains be taxed?

- $65,000 in income received in 2019-20

- Consulting rooms will be segregated pension assets from 1 June


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Bob & Jane’s accumulation balances



Consulting rooms are segregated pension assets from 1 June

Un-segregated part of Bob’s pension

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Use both methods to claim ECPI

Claim ECPI on segregated pension assets under segregated method

Claim ECPI on unsegregated assets using the proportionate method 1.257% exempt

Total income $65,000 Consulting rooms

$45,000 Shares and cash

$20,000


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Unsegregated assets 1.257% exempt $20,000 income on

shares/cash $41,000 income on

consulting rooms

Segregated assets 100% exempt $4,000 income on

consulting rooms


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- ECPI using both segregated and proportionate method

- Unsegregated ECPI = 61,000 x 0.01257 = 766.77

- Segregated ECPI = 4,000

- ECPI = 4,000 + 766.77 = 4,766.77

2020-21 income year

- Bob has $1,270,000 in an ABP and the consulting rooms are segregated to his pension for tax

purposes

- Jane has $320,000 in accumulation and is still working

- Looking to sell the consulting rooms


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Bob’s unsegregated pension balance

Claim ECPI using both methods

Segregated method 100% exempt

Proportionate method 42.323% exempt

Bob’s segregated pension balance (consulting rooms)

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Consulting rooms segregated pension assets at 1 July 2020

- Need to exclude segregated pension assets from the actuarial calculation

Show in opening balances on actuarial certificate application

Showing assets which ceased to be segregated

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Consulting rooms cased to be segregated pension assets

- Consulting rooms sold on 1 September 2020 for $1 million

- Capital gains incurred under the segregated method then proceeds became unsegregated assets

Show under internal transfers on actuarial certificate application

Showing assets which ceased to be segregated

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Bob’s pension balance


Segregated method on consulting room income from 1 July to 1 Sept 100% exempt

Proportionate method on all other income 76.536% exempt

Bob’s segregated pension asset

Consulting rooms sold 1 September realising a $300,000 capital gain under the segregated method, proceeds fall into the unsegregated fund bank account and are no longer segregated

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Bob’s pension balanceSold 1 Sept

for $1mCapital gain

$300k


Segregated method on consulting room income from 1 July to 1 Sept 100% exempt

Proportionate method on all other 2020-21 income 76.536% exempt

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Questions you need to ask:

- Does the fund have DSFA? How will the fund claim ECPI?

- Would the sale result in a capital gain or loss?

- What other events will/have happened in the year?

- How would the capital gain or loss be treated at the moment?

Map out the fund’s situation and consider whether adjusting the timing of sale, or other events in the year, could maximise the exemption on the capital gain

Tips for selling assets

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Government proposed red tape reduction measures in 2019-20 Federal Budget:

1. Fix anomaly where some funds solely in retirement phase require an actuarial certificate

2. Allow trustees to choose method for calculating ECPI

Remove deemed segregation

Can still choose to use the segregated method by documenting assets as segregated pension assets

Changes due to commence from 1 July 2020 – we await draft legislation

Are more changes coming?

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Cannot segregate for tax purposes if you have disregarded small fund assets

Can segregate for investment purposes if have disregarded small fund assets

Funds with elected segregation may be required to use both segregated and unsegregated method to claim ECPI

Think about maintaining a separate bank account for segregated pension assets or using notional sub accounts

Monitor liquidity issues where have large lump segregated pension assets

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Conclusions

Contact us

The information in this presentation has been prepared by Accurium Pty Ltd ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

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