The ATO’s approach to the segregation of single assets remains unclear, with one specialist law firm questioning whether the regulator’s initial interpretation of the practice is correct.
“The ATO did put out a tax determination, which they have withdrawn, basically stating you can’t segregate part of an asset. So if a property was worth $2 million, it wouldn’t be able to be segregated for $1.6 million from the outset,” DBA Lawyers special counsel Rebecca James said at the firm’s latest round of strategy seminars.
“We have made submissions on this as we actually don’t agree that the ATO is right on that point.
“Under the segregation [rules] of the Income Tax Assessment Act it basically notes that an asset has to be solely supporting the liability to pay a pension and we take the view that solely refers to the purpose – that the purpose of this asset is solely for your pension, not solely as in the asset as a whole.”
Although James said DBA Lawyers’ questioned the original single asset segregation ruling, she advised practitioners to stick to the approach presented in the now withdrawn tax determination in the immediate term.
However, she suggested an alternative strategy for SMSF trustees who wanted to segregate single assets such as property.
“So what some clients might do is look to buy a property through unit trust-type structures and then they could segregate a portion of the units. That’s a much easier way to segregate,” she said.
Purchasing property through a unit trust might be advantageous for SMSF trustees as it would also allow them to transfer out units as benefit payments, she added.
“So it might allow a little bit more flexibility if the fund has insufficient cash flow to pay the pension minimums every year,” she said.