SMSFs are able to claim a tax deduction for income derived from assets that support pension benefits. When a fund maintains both pension and member accumulation accounts the trustees can obtain a certificate from an actuary which identifies the percentage of income that can be claimed as tax exempt.
The alternative is for the trustees to segregate pension assets from the accumulation assets. Segregation is often difficult to achieve as assets must be clearly distinguishable as pension assets. This requires maintaining separate holdings for assets, for example, operating a pension bank account and an accumulation bank account, having separate share registry holdings for shares in a single company and so on.
As SMSF auditors, we have encountered numerous cases where funds have been unsuccessful in the segregation of assets. Examples include:
- Fund only holds one bank account which pays pensions, receives contributions and receives all income from pension and accumulation assets
- Where the fund does operate separate bank accounts errors such as payment of pensions from the accumulation account or deposit of accumulation asset income to the pension account
- Contributions deposited to pension bank account
- No splitting or inappropriate split of fund expenses
- Inappropriate transfers of monies between pension and accumulation bank accounts
- Assets not identifiable as segregated, e.g. a single holding of 1,000 BHP Ltd shares purporting to represent 500 shares held for pension and 500 held for accumulation whereas these parcels should be in separate holdings
- Pensions must be paid in cash. Therefore, illiquid / low income pension assets may not be able to support minimum benefit payments
Any one of the above may deem the fund not to be properly segregated in the eyes of the ATO. This may result in the fund not being able to claim a tax deduction for exempt current pension income.
Proper segregation of assets is difficult to achieve, requires high vigilance from the trustees to ensure assets are not mixed at any time and can prove costly in accounting and compliance fees. There are only limited circumstances where segregation of assets achieves lower tax liabilities than the alternative method of obtaining an actuarial certificate. Trustees of SMSFs that maintain accumulation and pension accounts should always obtain independent financial advice as to whether segregation of assets is appropriate for the fund and the needs of the members.
