Advanced segregation strategies in an SMSF · Actuarial method using (1 – exempt income pro...

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Advanced segregation strategies in an SMSF: elected segregationPresented by Melanie Dunn & Doug McBirnie

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Agenda

Segregation and disregarded small fund assets

Elected segregation

Ask an actuary… commonly asked questions

SMSF Association National Conference

– Concurrent Session 8A: The ultimate guide to understanding ECPI and segregation

– Plenary room 3

– Friday 22 Feb, 9.30am

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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

This method is most commonly used once a fund is fully in retirement phase Except if the fund has disregarded small fund assets it cannot use the segregated method

Segregated pension assets

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New 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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Elected segregationMust 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

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Elected segregation documentationDocument 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

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Electing for assets to be segregatedThe Good Life Super Fund

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Good Life Super Fund: full segregation

Jack has retired and commenced an ABP

Considering use of elected segregation

– Fund does not have disregarded small fund assets

Pool of assets worth $1,300,000

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

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Good Life Super Fund: full segregation

Elect to segregate exactly $850,000 of fund assets at 1 July 2018 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

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


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Good Life Super Fund 2018-19

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

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Good Life Super Fund 2018-19 ECPI

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

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

Net capital gain: $10,000


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

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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

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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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Marilyn Accumulation $450,500



Jack ABP $850,000

Jack pays minimum pension payment of $34,000…

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




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Jack takes lump sum payment of $15,000…

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

SMSF assets: balanced investment mix


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 2018

– Segregation documented in the fund investment strategy and separate bank account set

up for the property (also segregated)

ECPI in 2018-19 = 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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Segregated property

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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 2018-19

Segregated method ECPI = $42,500Proportionate method ECPI = 0.07482 x 15,515 = $1,160.83ECPI = 42,500 + 1,160.83 = $43,661

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

Actuarial method using (1 – exempt income proportion) is no longer fair and reasonable for general

expenses that relate to both segregated and unsegregated assets

– 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

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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

Good Life Super Fund expenses

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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

General administrative expenses

– relating to segregated assets will be non-deductible

– which are not distinct and severable must be apportioned based on a fair and reasonable method based on all fund assets

A fund that has elected segregation

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Can you use elected segregation only for investment purposes?

Is elected segregation commonly used in SMSFs?

What does the question on the application form ‘Is the fund eligible to use the segregated method?’ actually mean?

If I select that the fund is eligible to use the segregated method how come I don’t see any segregated assets in the chart?

Commonly asked questionsAsk an actuary…

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If I come via a platform with all the data pre-filled does it correctly complete all the information about segregated assets?

How do you show an asset becoming segregated/unsegregated during the year on the actuarial certificate application form?

Can you choose to treat the fund as not having elected or deemed segregation for tax purposes?

How should the income on a segregated asset be treated?


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How is a period where the fund is solely in accumulation phase treated under the ECPI rules? How is the income in this period taxed?

If a fund has an accumulation balance for part of the year does this mean you can’t use the segregated method?

Can you choose to segregate assets to support an accumulation account?


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QUESTIONS?

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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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