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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?

From 1 July 2017 there are three major changes affecting funds paying retirement phase pensions and claiming a tax exemption on some or all of their investment income (exempt current pension income or ECPI).  Will some of these create the need for a fund to have more than one actuarial certificate in a year?

From 1 July 2017 some funds providing retirement phase pensions are no longer allowed to be classified as segregated when it comes to claiming a tax exemption on some or all of their investment income (exempt current pension income or ECPI).  We have explained who, how and why in our blog Segregating in SMSFs beyond 1 July 2017.

This does create some new scenarios where these funds will now need actuarial certificates to claim their ECPI.

With some new rules for actuarial certificates coming in from 1 July 2017, the term "deemed segregation" has popped into the SMSF vernacular.  What does it actually mean and why is it important?

One of the many benefits traditionally enjoyed by funds entirely in pension phase was that when an asset was sold, any capital gain was completely disregarded.  Not only was there no tax paid on that particular capital gain but the fact that the gain was ignored entirely meant it also did not “use up” capital losses that the fund might have been carrying forward from previous years.

But what does the future look like on this front?

Understanding when a fund is "segregated" for tax purposes is critical in applying the tax rules to SMSFs providing pensions.  An important rule change from 1 July 2017 means that some funds are no longer classified as segregated even if they very much look like it - for example, they are entirely in pension phase.  In this article we explain which funds are actually no longer allowed to segregate for tax purposes and what that means when it comes to their tax exemptions.

The terms "segregated" and "pooled" (or "unsegregated") have been part of the superannuation landscape for 30 years (since superannuation was first taxed in 1988).  From 1 July 2017, however, the way we think about these terms for pension funds needs to change profoundly.

Accountants who use BGL Simple Fund 360 for their SMSF clients can now request actuarial certificates from Heffron with no re-keying, no hassle and an immediate certificate where the fund passes all our automated checks and balances.  We have also taken this opportnity to review the way we bundle our services to construct a range of special offers for BGL 360 users to celebrate our integration.