Utilising Member Choice To Manage Member Returns At Different Stages Of Their Life
With the introduction of 6 member Superannuation Funds we have seen an increase in queries relating to bringing children and/or their spouses into an existing fund and whether assets can be segregated to particular members.
The driving force behind this is asset or investment segregation more so than tax. It is not uncommon for members at different stages of their lifecycle to have varying aversions to risk. For example, the children may be happy to consider cryptocurrencies, while the parents are more comfortable with blue chip shares and term deposits.
The Superannuation Industry (Supervision) Act 1993 (SIS) and Regulations are silent on the concept of asset segregation. Having said that, SIS Regulation 5.03 does require trustees to allocate investment returns in a fair and reasonable manner, having regard to:
- All of the members of the fund; and
- The various kinds of benefits of each member of the fund.
This could be interpreted as suggesting that different options are available, and it could be argued that allocating earnings based on certain assets being allocated to particular members, or to a particular member’s interests, would still be deemed fair and reasonable.
Following on from this, whether a fund can segregate for investment purposes will be determined by the fund’s Trust Deed and the decisions of the trustees in accordance with that Deed.
The ATO also acknowledge the concept of asset segregation on their website. On their webpage addressing the methods for calculating Exempt Current Pension Income (ECPI) (QC21546) they have this to say in relation to the tax issues of using the proportionate method when the fund has disregarded small fund assets.
This change only limits an SMSF to using the proportionate method for the purposes of calculating ECPI. It doesn’t limit a fund from segregating its assets to accommodate member investment choices, nor does it reduce the amount of ECPI a fund can claim. It just means the amount is calculated using the proportionate method.
As mentioned above, different stages of the Member’s lifecycle can be a common driver for asset segregation between members. Other scenarios where differing investment choices may influence a trustee’s decision to look to segregate assets may include when business partners or siblings are in the same fund. We have even seen separated couples stay in the fund together and look to separate their assets.
This strategy can also be utilised where funds have some members with balances over $3 million and subject to the proposed Division 296 Tax and other members under this balance. Assets can therefore be allocated in a manner where only actual cash earnings are allocated to members over $3 million and unrealised growth is allocated to members with lower balances. This is done via effectively allocating assets that generate cashflows to members liable for the proposed Div 296 tax and assets that are purchased for capital growth to members who are not subject to the tax.
If you need to discuss any tax related matter, please call Ross, Mimi, Chris or Sean on 9481 8448.