2 Super interests & Calculation of tax free income – Segregated Assets

Where there is an Accumulation Interest and a pension interest then the pension exemption on earnings to fund the pension will not apply to the accumulation interest, a calculation is therefore required to determine the tax exempt income amount and the amount that is subject to the SMSF tax rate of 15% see tax tables for changes.

The calculation methods are:

• Segregated pension assets approach – assets set aside (segregated) from non pension assets, and shown in the member account comprising the total of the account balance of the member. Entire income from these segregated assets are exempt. No Actuarial. Entire income from these segregated assets are exempt (s295-365(1). Accordingly no actuarial certificate is required to apportion assets between pension and accumulation interest (S295-3385(4)&(5) and reg 295-385.01. <ATO-Link>.
• Unsegregated pension assets approach – the assets are NOT set aside (segregated), so that the assets are combined to produce a net income for both the accumulation interest and pension interest. In this instance a actuarial certificate is required to apportion income and expenses between pension and accumulation interest in order to calculate the income that is exempt income for pension purposes and assessable for accumulation interest purposes, (S295-390). Note however that while capital gains are likewise apportioned, capital losses are not, they are retained in full in the fund.<ATO-Link>

The exempt income portion means any capital gains (and loss is disregarded). Concessional contributions are not apportioned and are fully assessable. There is no time limit to become a segregated asset, the trustee need only make a determination that an asset is segregated and it can be effective immediately. Further the start date for the pension exemption is the commencement date not the date the first payment is made, as evidenced by trustee minutes or other documents.

The determination of whether a single asset can be segregated between an accumulation interest and a pension interest depends on which approach you believe is correct:

• Sole Purpose Approach – provided the segregated pension interest is solely for the purpose of funding a pension then a single asset can be segregated; or
• Sole Asset Approach – provided the entire assets is soley set aside for the sole purpose of funding a pension, so a single asset cannot be segregated.

The ATO were to review these approaches and provide a position.

Here’s what the ATO has to say <ATO-Link1><ATO-Link2>