When we use the term “segregation” or refer to an asset as being “segregated” in a superannuation fund, we are generally referring to a tax concept which relates to funds providing retirement phase pensions.
In a nutshell, if a fund has assets that are purely supporting one or more pension accounts and those assets are classified as “segregated” for tax purposes, the fund claims a tax exemption for all investment income earned on those assets (known as exempt current pension income or ECPI). Providing the fund doesn’t provide any defined benefit pensions, it doesn’t even need an actuarial certificate to claim this tax exemption. Other funds with pensions – where the assets supporting those pensions are not classified as segregated – claim their tax exemption using a different method often referred to as the “actuarial certificate method”.
But the Income Tax Assessment Act 1997 also allows trustees to set aside assets exclusively for precisely the opposite purpose – ie to support accumulation (non pension) benefits. Providing the fund is allowed to have segregated assets (see below), assets set aside in this way can be treated as “segregated non-current assets”.
Not surprisingly, earnings on segregated non-current assets are subject to the usual tax rate of 15%. So why would anyone bother – why would a fund choose to isolate some of its assets for the sole purpose of supporting an accumulation account?