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New tax determination holds concerns

The latest Australian Taxation Office (ATO) draft tax determination addressing asset segregation associated with pension payments contains some areas of concern, of which SMSF trustees will have to be mindful when looking to fund a retirement income stream, according to a specialist lawyer servicing the sector.

TD 2013/D7 was released on 7 August and will take effect from 1 July 2014 once finalised.

Townsends Business and Corporate Lawyers special counsel for superannuation Michael Hallinan has identified four main areas SMSF trustees will need to examine.

The first of these involves segregations lasting for a very short time period before the segregated asset is disposed of.

Hallinan said he suspected the ATO was concerned with situations he described as “Friday segregation and Monday disposal” that might result in a significant tax advantage for the fund.

“This may be an issue where the fund had non-pension interests during the financial year so that a disposal of an unsegregated asset would have generated some assessable income,” he said in a paper outlining the subject.

He suggested long-term planning regarding the sale of SMSF assets, particularly illiquid ones, was more important, as was the practice of segregation well in advance of any disposals.

The second area of concern Hallinan flagged was the fact the determination dictated where the market value of segregated assets exceeded the pension account balance, the excess assets could not be considered to have segregated status.

Property was one asset class likely to create a problem in those circumstances, especially if the pension was only partly supported by it, he said.

“If the pension has been supported by two or more segregated assets, the trustee may be able to identify the excess as being entirely constituted by one or more segregated assets, thereby saving the lumpy asset from ‘de-segregation’.”

When examining this ruling, Hallinan warned trustees and their advisers to be mindful of the ‘to the extent’ definition outlined in the draft determination.

In particular, the definition is not applied in a proportional sense, meaning if the market value of the asset exceeds the pension account balance, the entire asset will be excluded from the segregation criteria.

The final item SMSF trustees had to look at carefully in Hallinan’s view was the interpretation of the use of reserves in the segregation process as defined by the draft determination.

Here the regulator has stipulated an asset will be considered segregated when it is ‘held in reserve’, meaning when the asset is not currently producing income.

“An asset is not held in reserve when it is used to support an investment reserve or a pension reserve to deal with mortality risks for non-account pensions,” Hallinan said.

“This interpretation of ‘held in reserve’ permits the ATO to exclude investment and other reserves from the benefit of the pension liabilities income exemption.”

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