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.
Traditionally, pension funds were segregated under only two circumstances:
- funds that were entirely in pension phase all year (often referred to as "segregated by default"); and
- funds where the trustee set aside specific assets to support one or more pension accounts and kept these quite apart from the assets supporting members' accumulation accounts.
Being segregated (or not) was important in determining whether the fund needed an actuarial certificate.
For the last 10+ years, funds have been able to claim a full tax exemption on any income earned on segregated assets without needing an actuarial certificate. Funds holding assets that were supporting pensions but were not segregated needed an actuarial certificate to support their tax exemption.
Conceptually that did not change from 1 July 2017.
But two things did change:
- During 2016/17, the ATO clarified its view that a fund paying only pensions at any point during the year would be considered segregated (by default) for that period but pooled or unsegregated for the rest of the year. Given that it was way out of step with common industry practice in SMSFs, the ATO agreed to take a fairly relaxed view on this during 2016/17 and earlier years but signalled that the Commissioner would expect the law to be applied in this way from 1 July 2017 (subject to the second change below);
- From 1 July 2017 some SMSFs (and only SMSFs) are actually legally prohibited from having any segregated assets for tax purposes. Assets that might look segregated (eg in a fund that is 100% in pension phase) are actually given a new name - "disregarded small fund assets" - and are never treated like segregated assets.
Taken together the impacts are significant.
Change 1 means that a fund that is allowed to be segregated in the future (subject to Change 2!) might actually have to claim their tax exemption by breaking the year up into multiple smaller periods. For example, if the fund was entirely in pension phase from July - October, received a contribution in October and converted that contribution to pension phase in January, there might be three distinct periods with different rules for tax exemptions :
- July - October : the fund would claim a tax exemption on all investment income (as it was 100% in pension phase and therefore segregated by default)
- October - January : an actuarial certificate would be required and the % shown in that certificate would be applied to any income earned in this period
- January - June : back to 100% pension phase - so all income would be tax exempt.
Selling a property in (say) December would potentially produce a very different result to selling the same asset for the same price two months later in February.
Change 2 means the exact opposite - funds that we may have assumed are segregated all year (or even for just part of the year) will now be considered unsegregated or pooled all year. A great example here would be a fund that had two members, all in retirement phase pensions (no accumulation accounts) where they are not allowed to segregate. Even though the fund is entirely in pension phase, an actuarial certificate (stating the obvious - that 100% of the fund's investment is exempt from tax) would be required.