Segregating funds within a single SMSF can offer cost savings and tax advantages, but in many cases it can be a recipe for disaster, a lawyer specialising in the area has warned.
“Where people are inclined to have segregated funds, the simple answer is usually for them to have different funds,” Allan Swan, a director of asset and wealth management law firm Swan and Yii, told the 2014 SMSF Professionals’ Association of Australia National Conference in Brisbane yesterday.
In most SMSFs, assets are pooled between members and allocated to each in proportion to their individual superannuation balance. In segregated funds, individual investments within the fund are allocated separately to each member.
There can be cost savings to running one SMSF with segregated funds, rather than several separate SMSFs. But Swan said it was necessary to administer the segregated parts individually and run different bank accounts for each part, which ate into the potential cost saving. Audits can also be more complex and more costly in segregated funds.
There could be significant tax advantages to segregating assets within a single fund if one member was in pension phase and other members were in the accumulation phase, Swan said.
“You can get capital gains [on assets held by a member] in the pension phase but don’t have to pay any capital gains tax, but in the accumulation phase you do have to pay capital gains tax,” he said.
“It sounds attractive but it doesn’t work too well in practice. The practical reality is that the members are not always comfortable with the fact the assets that have capital appreciation are all assigned to one member.”
Disputes can arise, particularly when members have different estate planning goals. In the case of blended families, for example, there can be complications if the members have different ideas about how to distribute the assets to beneficiaries after death.
Each member’s beneficiaries are entitled to the assets held in their segment of the fund, giving other members little say in how the investments are distributed on the member’s death.
“Segregated funds work better if it’s a couple and they have the same estate planning ambitions for which assets go where,” Swan said.