SMSFs with assets that are pooled together are considered unsegregated while those with specific asset allocations are considered segregated.
Unsegregated funds or pooled assets are more popular with SMSFs, but segregated funds also hold advantages over the latter when pension phase commences for member.
Nest Egg compares the two asset segregation methods to understand its main differences and help trustees plan and report accordingly.
What does ‘unsegregated funds’ mean?
An unsegregated fund basically means that an SMSF has pooled together its income-producing assets for the benefit of all its members, regardless of their current status.
The assets may be pooled together when the SMSF members agree on the same investment strategy, regardless of age. Assets may also be pooled if the underlying asset is difficult to divide among its members—for instance, an investment property for the family’s restaurant.
In such cases, all SMSF member contributions are invested in the business assets during the accumulation phase. Since all monies are invested in the same set of assets, retirement benefit payments are also sourced from the income it produces.
What are segregated funds?
Segregated funds are composed of underlying assets that are allocated according to the agreed SMSF strategy.
The allocation may be for each member who would contribute to their chosen investment during the accumulation phase and receive pension payments from the same set of investments during the pension phase.
Likewise, an SMSF may simply allocate specific assets for retirement benefit payouts when a member commences their pension phase.
The ATO also considers the two conditions below as SMSFs that have segregated funds:
- The SMSF is 100 per cent in accumulation phase; or,
- The fund is 100 per cent in pension phase.
If any member exceeds the $1.6 million balance cap, the SMSF must roll over the excess to an accumulation account. Transition to retirement income stream (TRIS) are also reverted to accumulation phase, according to the changes in regulations in 2017.
Comparing segregated and unsegregated funds
The table below compares the 2 asset segregation methods more clearly.
|Unsegregated Funds||Segregated Funds|
|Structure||All assets are pooled together||Assets are allocated according to a member’s investment preference or status (accumulation or pension)|
|Number of asset pools||All members share in 1 big asset pool|| |
|Management||Simpler to manage|| |
|Fees||Fewer fees due to simpler management process||Extra work leads to more fees|
|Regulations||Straightforward||More compliance regulations exist|
|Tax Exemption||An actuarial certificate is required if the SMSF wishes to claim exemption||Actuarial certificate is not required unless the fund was only segregated for part of the tax year or the segregation is hybrid|
|Tax||An actuary computes for the proportion that is tax exempt|| |
This information has been sourced from the Australian Taxation Office.