Can my SMSF “segregate” assets to support pension accounts and avoid paying CGT?

Sometimes. But it depends on the fund meeting some rules and how it’s done.

Let’s paint a picture:

• Joe turned 65 on 2 January 2025
• He chose to start a pension with as much as he could at the time ($1.9m) and the rest of his super ($200,000) stayed in his accumulation account
• He’s the sole member of his SMSF and it sold a property in March 2025

The question we’re often asked is: Can the trustee of Joe’s fund make sure that the property is “segregated” so the capital gains on the sale will be entirely tax free?

It sounds simple but let’s unpack what’s really going on.

Making conscious decisions

Because Joe’s fund has both pension and accumulation accounts, we usually call any segregation his fund does “voluntary segregation”.

Just like starting a pension, voluntary segregation isn’t something we can do after the fact. It has to be intentional, documented and in place “from now on” rather than backdated.

So it’s not something Joe and his accountant can decide to do “now” when they’re working on the 2024/25 financial statements.

If the decision had been made back in January when his pension first started – or even a month or so later (but before the sale) – it could have been segregated.

Hang on, doesn’t Joe have too much super to do this anyway?

Not all funds are allowed to do this “voluntary segregation”. In fact, if Joe’s fund had any member with:

• more than $1.6m in super, and
• a pension like Joes’s in place

back on 30 June 2024, the fund couldn’t do voluntary segregation at all, no matter when the decisions were made. It feels like Joe’s fund might miss out – he does have more than $1.6m. But remember, his pension didn’t start until 2 January 2025. So his fund is actually OK in 2024/25 (although it won’t be allowed to segregate in 2025/26).

If Joe’s fund can’t segregate the property is everything lost?

No. It will still be entitled to a tax exemption on some of the capital gains. He’ll get an actuarial certificate to say how much.

It might “feel like” around 90% of the discounted capital gains should be tax exempt. Afterall, about 90% of the fund is in pension phase at the time of the sale. But in fact the % will be worked out across the year – it will be closer to 45%.

A cautionary note

Even if the timing is perfect, decisions are made in advance rather than after a property is being sold, it’s really important to remember schemes that are motivated exclusively by tax savings get scrutiny from the ATO with Part IVA firmly in mind.

Things for Joe to watch (and make sure he had valid reasons for):

• is he genuinely starting a pension because he wants an income stream or just to avoid CGT? Things that might suggest it was just to avoid tax would be : the pension started very shortly before the asset was sold and there doesn’t seem any obvious reason for that timing, the pension was stopped shortly after it had “served it’s purpose” and achieved the tax exemption, or the fund was wound up immediately.
• is the segregation completely contrived – ie, solely motivated by getting a tax exemption? Joe’s fund won’t be able to use any segregation next year – making this one appear fishy.

The takeaways

There are a few:

• in super, pretty much nothing can be backdated. So Joe’s decision to start a pension and the trustee’s decision to segregate need to be made in advance,
• documentation is vital,
• just because the property was sold after the pension started, it won’t necessarily follow that all, or even most, of the capital gains will be tax free.