• Segregated method

    Your SMSF has segregated assets if you have:

    • set aside certain assets so that the income from these assets can be specifically identified as having the sole purpose of paying a super income stream benefit
    • obtained an actuarial certificate (if needed)  
      • before the date of lodgment of the SMSF annual return for the income year
      • which verifies that the assets and earnings that the actuary expects will be made from those assets are sufficient to pay, in part or in full, the benefit liabilities when they are due.
       

    The ordinary income and statutory income that an SMSF earns from segregated current pension assets is tax exempt. For the purpose of working out the amount that is exempt from tax, ordinary income and statutory income of the SMSF is income other than assessable contributions and non-arm's length income of the SMSF.

    Attention

    Capital gains or capital losses from a capital gains tax event in relation to a segregated current pension asset are disregarded. For more information, see What effect do capital gains and capital losses have on an SMSF's claim for ECPI?

    End of attention

    You must include the ordinary income and statutory income you receive from the segregated assets in the income section of the SMSF annual return. You can claim the tax exemption by filling in the ECPI label (label K) in the deductions section of the return.

    If you intend to use the segregated method, you need to consider whether the SMSF's income stream assets meet the requirement of being 'segregated'. You need to determine whether:

    • these assets are clearly identified as the assets dedicated to funding the super income stream benefit
    • there is a clear relationship established between the relevant assets and the member's account.

    Where all SMSF fund members are receiving a pension and the combined account balances of these pensions is equal to the market value of the fund's total assets, in effect all assets of the fund will meet the requirement of being 'segregated' as they have the sole purpose of paying super income stream benefits. In this situation the ATO will accept that the SMSF is not required to identify individual assets as being dedicated to funding a super income stream benefit.

    As previously noted, assets of the SMSF that are supporting a super income stream benefit that is prescribed by the regulations (that is, allocated, market-linked or account based) are not segregated current pension assets to the extent that the market value of the assets exceeds the account balance supporting the benefit.

    Example 1

    The AXY SMSF has assets of $2,000,000. Member A (who is receiving a super income stream benefit that is not an allocated, market-linked or account-based pension) has an account balance of $1,200,000, and member B (who is still in the accumulation phase) has an account balance of $800,000. The trustees have identified specific assets of the SMSF that total $1,200,000 as having been set aside for member A($500,000 in shares, $500,000 in property and $200,000 in a bank deposit), and these SMSF assets are used to pay his income stream benefit. These assets are segregated current pension assets. The trustees of the SMSF must get an actuarial certificate to verify that those assets, and the earnings that the actuary expects will be made from them, are sufficient to pay, in part or in full, member A's income stream benefit.

    The income that is earned from these assets is exempt from tax. For the above SMSF, if we assume that assets set aside for member A ($1,200,000) earned $100,000 in income and the other assets of the SMSF earned $60,000 in income, then exempt current pension income is $100,000. This would be shown on the SMSF annual return as follows:

    Total assessable income

    $160,000 (included at item 10 label V of the SMSF annual return)

    less ECPI

    $100,000 (the fund claims this exemption by including this amount at item 11 label K of the SMSF annual return)

    equals  Taxable income

    $60,000 (included at item 11 label O of the SMSF annual return)

     

    End of example
      Last modified: 13 Apr 2015QC 21546