If you have more than one member of your self-managed super fund (SMSF), then it’s worth exploring the option of segregated accounts. According to the latest figures from the Australian Taxation Office, you’re in the majority if you have two to four SMSF members. Single-member SMSFs only account for around a quarter of all self-managed super funds.
If you’re interested to learn more about the potential benefits of holding a segregated SMSF, then read on as we introduce the basics of segregated SMSF accounts.
What are segregated SMSF accounts?
Segregated SMSF accounts are SMSFs that have separate sub-accounts for each member. Each account has its own separate investments and generates its own capital growth (or losses) and income as well as paying for its own account expenses.
The alternative is to have all SMSF funds pooled together with investment income and growth (or losses) shared evenly, along with SMSF expenses.
Are segregated SMSF accounts common?
Almost three out of every four SMSFs in Australia have multiple members, but out of these funds, only a small number are segregated. For spouses who wish to combine their superannuation investments, pooling funds can often be more convenient. That’s not to say that segregated accounts can’t be beneficial for SMSFs whose members are two spouses. After all, nearly 70% of all SMSFs have spousal members – SMSFs with three-plus member funds only represent 7% of all SMSFs in Australia.
What are the benefits of segregated SMSF accounts?
Segregated SMSF accounts can provide members with both tax benefits and investment benefits when it comes to diversifying the fund’s investment strategy. Segregating an SMSF can be done in a multitude of ways; for simplicity’s sake, it is often easiest to look at two distinct levels – segregating at the ‘member level’, and at the ‘fund level’.
Segregating at the Fund Level
When SMSFs are segregated at the fund level, it is often for the tax benefits in relation to claiming exempt income. For example, a common strategy is to segregate the fund by accumulation phase and retirement phase interests. This is often when one member of a fund is within the pension phase, and receiving an income stream. If the remaining member (or members) are in the accumulation phase, segregating in this way can provide better clarity and ease of determining the amount of income from the fund that is exempt from tax, without requiring an actuarial certificate.
Other reasons for segregating an SMSF at the fund level could be to distinguish between Australian funds and those that are received by foreign-sourced transfers. This aids in the reporting obligations required for foreign transfers and satisfying any asset restrictions, such as the UK asset restrictions.
Segregating at the member level
Segregating an SMSF at the member level can be done to help with tax exemption, however, it’s mostly done to satisfy drastically different investment objectives between members. Segregating at the member level means that ultimately, each member has their own investment pool that ties to their overall member balance. Particularly now that SMSFs can have up to six members, it’s possible that SMSFs have members at different life stages (such as a multi-generational family). This inherently increases the possibility that members of SMSFs will be in different life stages, and consequently have different investment horizons, risk tolerances and income needs.
What are the drawbacks of segregated SMSF accounts?
Segregated SMSF accounts can be more complex to administer and not every SMSF setup will necessarily benefit from segregating their fund. As is with any SMSF investment strategy, the underlying investments need to remain appropriate for the objective of the fund and its members.
If purchasing property within your SMSF is one such investment that you’re considering, then speak to the experts when it comes to SMSF Loans. At SMSF Loan Experts, not only are we specialist SMSF lenders, but we also maintain close relationships with other SMSF specialists, meaning that you have access to expert advice across all areas of Self Managed Super fund ownership, to know how an SMSF Loan for property ownership could work within a segregated fund.
Our goal is to keep things as simple and painless as possible – we look forward to chatting with you about how we can assist with your SMSF Loan.