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Superannuation, Tax

Segregation a potential tax rort

Asset segregation tax avoidance

Asset segregation will not protect trustees seeking a tax avoidance arrangement, with the ATO watching these situations, a technical expert has advised.

Trustees should not assume using the segregated asset method to calculate exempt current pension income will offer their SMSF protection from tax avoidance issues, a technical expert has warned.

SuperGuardian education manager Tim Miller pointed out the purpose of asset segregation was to fund the income required to provide retirement benefits for members, and trustees who viewed it as a way to potentially avoid paying capital gains tax on the sale of assets needed to think again or risk running afoul of the ATO.

“It shouldn’t need stating, but segregation is not a tax avoidance arrangement,” Miller said during a recent SuperGuardian webinar.

“The ATO have released a number of documents over time where they have absolutely reiterated that point with asset segregation and identifying that if your objective is to start a pension and segregate an asset to sell that asset to offset the tax on it, then they will look at some of those transactions to determine whether or not that transaction was entered into from a pure tax avoidance point of view.”

In addition, he said asset segregation did not have to translate to having separate accounts, though trustees might find the physical separation of assets beneficial from an administrative standpoint.

“This is one of those areas where it helps to have separate investment portfolios from an administrative point of view, but it’s not an actual requirement that the fund goes out and creates those separate accounts,” he noted.

“From an administrative point of view, you want to make sure that you’re documenting these sorts of things prior to the point that you move into segregation so it’s clear, from an audit and tax point of view, which assets are actually segregated.”

He also noted timing was crucial for any SMSF using the segregated asset method to maximise their capital losses for tax purposes, and the potential rewards of such a strategy could easily be outweighed by the potential risks, depending on when the segregation occurred.

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