Hi Kate

I put your question to Melanie Dunn an actuary at Accurium and she advised as per the below. Her answer is in effect saying there may be the ability to segregate assets for an existing pension but there are several issues to consider. From an audit perspective the documentation that you should be requesting is minutes re which assets are to be segregated and an updated investment strategy that allows for the segregation of assets. Her answer is:

"If an SMSF has been operating as unsegregated and would now like to implement a segregated investment strategy in the fund, then this may be possible depending upon a number of factors.

First, I will assume we are thinking about segregated pension assets – that is assets segregated to a retirement phase income stream, not segregation of assets to non-retirement phase. Typically, this is considered where a fund has both accumulation and retirement phase accounts and is not solely in retirement phase.

To segregate assets to a new or existing retirement phase income stream for a particular member or group of members the whole asset must be segregated, you cannot segregate part of an asset e.g. a property valued at $400k can be segregated to a pension account or pool of pension accounts valued at $500k but not those valued at $300k.

If a segregation strategy is to be employed this should be documented as part of the fund’s investment strategy. Consideration should be given to what the segregation of the asset does for each member’s risk profile, liquidity, diversification etc per the investment covenant requirements of section 52 of the SIS Act. The trustees should review that the outcomes are appropriate for all members of the fund. E.g. if a $400k property is segregated to a member’s $500k pension account and that is the only account of that member, and the fund has another member with $500k in accumulation phase, then with the property ‘growth’ asset now allocated to the pension member, they need to be mindful of liquidity issues going forward, and accepting that their investment profile has become more ‘growthy’ and less diversified, and on the other hand the accumulation member, although unsegregated, may effectively have a more defensive risk profile with that property segregated to the pensioner, and whether that is appropriate for them and the fund.

If the fund is looking to segregate for tax purposes (that is for claiming ECPI) then this will only be possible if the SMSF does not have disregarded small fund assets (DSFA). If for an income year if the fund does have DSFA then the fund must use the proportionate method to claim ECPI. Assets can continue to be segregated for investment purposes. The DSFA status of a fund could change year to year depending on the circumstances of the fund.

An asset also cannot be segregated for tax purposes to the pension reserve supporting a defined benefit income stream, as the pension reserve is generally considered to be partially tax free based on the actuarial calculation of retirement phase liabilities.

Similarly, if the fund has segregated pension assets, and in an income year the fund ends up with a period of deemed segregation, then where the fund has a choice for how to claim ECPI (does not have DSFA and is not solely in retirement phase) if an election is made to apply the choice to treat the fund under the proportionate method, not that this will also undo any elected segregation of assets in that year for tax purposes. E.g. the segregated property in the example above would not be treated as segregated in that year for ECPI.

Where a fund has assets segregated to a retirement phase income stream, if assets are segregated such that the entire balance of the pension is segregated, and the only unsegregated assets are those supporting non-retirement phase accounts in a year, then an actuarial certificate will not be required, the SMSF can claim ECPI using the segregated method assuming the pension standards were met.

However, there remain unsegregated assets supporting retirement phase income streams, like in the example above, then an actuarial certificate would still be required to claim ECPI on unsegregated assets. The fund would use both methods to claim ECPI. The actuary would exclude the segregated pension assets from the calculation and the exempt income proportion would apply only to the relevant assessable income on the unsegregated assets in the income year.

More information on segregation and requirements for actuarial certificates can be found at the following useful links:

• Flow charts for if require a certificate, if have DSFA, if can use ECPI choice

• ECPI getting it right

• Issues with segregating large assets"

Thanks

The Auditors Institute