Each SMSF can either be run as a segregated or unsegregated fund. Segregated funds hold separate asset pools that are specific to different members or specific to pension versus accumulation balances. Unsegregated funds have one large asset pool, and all members share in the combined investment returns.
With unsegregated funds, one pool of assets is held, corresponding to all member balances. The investment returns on those assets are spread across all members in proportion to their member balances.
With segregated funds, 2 or more asset pools are established. Each asset pool either corresponds to a member, pension balance, accumulation balance or combination of these. Some examples might be:
The key requirement is that separate pools of asets are held.
The benefits of unsegregated funds
There is one key benefit of unsegregated funds. Simplicity. This is such an important benefit that it usually outweighs the benefits of segregation. In my experience, only a few per cent of funds are segregated and there is a good reason for this. To put it another way - if you want to run a segregated fund then you should have a very clear rationale for doing so.
The fund accountant or administrator is likely to charge more to run a segregated fund due to the additional complexity it creates. Segregated funds are also more likely to incur a penalty from the ATO for breaching the SMSF rules.
The benefits of segregated funds
Here are some situations where segregated funds might be warranted:
Segregated funds don't need to obtain an Actuarial Certificate. Depending which actuary you use, this could be a large cost saving. If you use Lime Actuarial then you won't save as much because our Certificates represent such good value at only $110 plus GST. In other words, Actuarial Certificates are now so affordable that they should no longer be a reason to segregate.
In late 2013, the ATO released TD 2013/D7 which dealt with segregated assets. This Determination was withdrawn in December 2013 because it didn't adequately address bank accounts. More recently, TD 2014/7 was released which deals specifically with bank accounts, however doesn't cover many other topics that were originally included in TD 2013/D7.
The key point is that the regulators are imposing tighter restrictions on segregated funds, making them more difficult to operate and narrowing the situations where they are warranted.
While both segregated and unsegregated funds have their place, unsegregated funds are far easier to operate and are therefore more common. Caution should be exercised in operating segregated funds to ensure they are being run correctly.
Greg Einfeld has over 20 years’ experience in the Australian Superannuation and Financial Services industry. He has MEc and MBA degrees, is a licensed financial adviser, a qualified actuary, and specialises in Self Managed Super Funds (SMSF’s). He regularly presents on a variety of SMSF topics including investment, tax, estate planning, pensions, administration and strategies.