Superannuation regulations permit investment segregation to be used in an SMSF subject to the ‘fair and reasonable’ standards, however, behaviour intended to manipulate tax outcomes, specifically setting up a second SMSF, will bring ATO scrutiny.
DBA Lawyers senior associate William Fettes told the DBA Network November SMSF Strategy Seminar in Sydney today that SMSF trustees can circumvent new restrictions on using the segregated method to calculate their fund’s exempt current pension income by establishing a second SMSF.
However, Fettes referred to the ATO’s frequently asked questions page on the super changes, which states trustees need to seek independent professional advice or approach the tax office for advice beforehand.
He particularly pointed to the ATO’s warning it will further scrutinise circumstances where it appears the establishment of the second SMSF is intended to manipulate tax outcomes, including, for example, by switching each of the respective funds between accumulation and retirement phase.
“I think that idea of switching is a good keystone point for both ideas: the segregation for tax purposes and also segregation for investment purposes,” he said.
“I think it’s going to be more aggressive if we’re looking at switching these things around on a very granular level, particularly during the middle of the financial year. That’s going to give rise to more concern of scrutiny coming up.”
Funds can switch on a whole-of-financial-year basis, change the segregated pool, and then do it on another financial year basis, he noted.
“I think that’s fine if it’s supported by the investment strategy review process, which I think it is a requirement in the law to formulate and regularly review the strategy so you’re not locked in for years and years,” he said.
“But I think where you are aggressively switching it around, that’s going to give more rise to risk for the purposes of ATO review.”
In terms of documentation for this strategy, trustees need to have a trust deed in place to ensure they have the appropriate powers and rules in place, he said.
It should also ensure there is flexibility without overly prescriptive rules about allocation and express powers to allocate based on the segregated pool for investment returns and other purposes, he said.
“The trustee is making those decisions so they’re taking into account all of the members’ appetites and in terms of their risk profile what is required to pay benefits in terms of what their status is and needs for retirement, and servicing all that,” he said.
“So there are obviously requirements in the SIS (Superannuation Industry (Supervision)) regulations and in the act around formulating and regularly reviewing an investment strategy. But it’s not very prescriptive rules in terms of what the investment strategy contains.
“But notwithstanding that, I think what we’re trying to achieve is something that’s fair and reasonable.”
The investment strategy is the trustee’s vehicle for documenting the fair and reasonable allocation to show other members, he said.