SMSF trustees looking to segregate investments among members should be aware all assets must still fit under the fund’s overall investment strategy and without specific documentation will also be subject to its death benefit rules.
DBA Lawyers senior associate William Fettes noted investment segregation was not commonly used in SMSFs as they operate on a pooled, proportionate basis in relation to account balances with no connection between assets and members.
“There is more interest in a family SMSF context because the more members you have in an SMSF, the more views you might have about an appropriate investment approach,” Fettes said during a recent webinar.
“This kind of strategy can be attractive, even though it’s not standard, but you need a deed that allows for it because you do have a compliance requirement here.
“This requirement is the fair and reasonable standard, which means crediting and debiting investment returns have to be fair and reasonable between the members and between the different types of accounts. Similarly, the charging of costs between members and the different types of accounts have to be fair and reasonable.”
He added that to meet the fair and reasonable standard there has to be a proper basis for what happens in regards to assets from the start of each financial year, which is also agreed upon by the members.
“Something I would not call a proper basis would be that at some time after the end of the financial year looking back at the performance of the assets there is some sort of allocation exercise with no prospective arrangement and no member investment choice concept recorded and put in place in advance,” he said.
“You want to have something that is agreed to where the members have done that prospectively and I would also want to see this kind of thing done for a full financial year as it’s going to be difficult to do it on a part-year basis.
“Of course, it has to be consistent with the fund’s investment strategy and include appropriate systems in relation to the accounting of income losses, gains, tax entitlements, costs and other aspects.”
He highlighted these separate arrangements should also be reflected in any death benefit planning.
“If you have a segregation arrangement in the fund, members may expect the binding death benefit nomination (BDBN) to cover that, but this is not the default position for the average BDBN,” he said.
“So any fund members entertaining asset segregation should be cautioned it doesn’t automatically translate over to succession planning arrangements.
“Instead, they may need a more tailored BDBN based on an appropriate deed to deal with that properly and this will be a nomination structured in such a way that it refers to this segregated asset pool.”