Unsegregated vs segregated SMSFs - what is the difference?

Self-managed superannuation funds (SMSFs) in Australia can come in two forms:

  • ‘Segregated’ where there are separate sub-accounts for each super fund member or separate asset pools within the fund for tax purposes. Around three in four SMSFs in Australia have multiple members but of these, only a small number are segregated.

  • ‘Unsegregated’ where there are multiple members sharing one asset pool. These are generally far easier to administer and are more common.

SMSFs can generally be split into two buckets for tax purposes - ‘accumulation’ where income and gains are taxed at 15% and ‘retirement’ (also known as pension phase) where income and gains are generally tax-free. Under the segregated method, you can designate an asset solely into the retirement bucket, identifying it as a segregated current pension asset. That means any income derived from that asset (e.g. dividends, rental income, etc.) is exempt from tax. Regulations have made this more difficult over the years, but some may still use this method.

Conversely, unsegregated (also known as ‘proportionate’) SMSFs do not require specific assets to be separated or designated as solely for retirement income purposes. Rather, a proportion of all the fund’s income is tax exempt (more on that later). For this method, you need an actuary to provide an actuarial certificate that determines what proportion of an SMSF’s earnings are derived from its members' retirement-phase income stream compared to its accumulation-phase income stream.

Capital gains are also treated differently between the segregated and unsegregated methods. Under the segregated method, capital gains and losses on segregated assets are ignored in a tax sense. But if you’re using the unsegregated method, net capital gains (i.e. gains minus losses) are included as part of the fund’s assessable income, while net capital losses are carried forward to future years until they can be offset against a net capital gain.

You’ve made it this far, have a Simpsons GIF…

via GIPHY

Unsegregated SMSF tax implications

So, unsegregated essentially means proportional. Under this method, the proportion of the fund’s income that is exempt from tax is essentially based on what percentage of the fund’s balances were in the retirement phase, on average, over the year during which the proportional method was used. As mentioned, this is determined by an actuary.

So, as an example, say the actuary determines that, over the year, an average of 70% of the fund’s balances were supporting retirement-phase income streams. In that case, 70% of the fund’s capital gains and income will be exempt from tax, while the remaining 30% will be taxed at 15%.

What is a disregarded small fund asset?

There are some instances where you may have no choice but to use the unsegregated method, such as having a pool of what are called, ‘disregarded small fund assets’ in your portfolio. This will prevent you from being able to use the segregation method for calculating your exempt current pension income (ECPI), forcing you to use the proportionate method. The SMSF’s assets could be deemed as disregarded small fund assets if:

  • Any time during the income year, it had at least one retirement-phase income stream (i.e. the SMSF wasn’t 100% in accumulation-phase), and

  • A member has a total superannuation balance exceeding the $1.6 million cap, and

  • That member is also receiving a retirement-phase income stream, be it from the SMSF or another super fund.

However, if the fund has no disregarded small fund assets and the SMSF is in 100% retirement phase (i.e. there are no accumulation accounts), all of the fund's assets are considered by the ATO to be ‘segregated current pension assets’, so your ECPI is calculated using the segregated method.

But if the fund isn’t in 100% retirement phase or 100% accumulation phase and doesn’t have disregarded small fund assets, it may have the option to use either method for calculating ECPI.

So, like with most things related to self-managed super funds, it pays to be prepared. Otherwise, you’ll have to do what Andy does to Woody…

woody

Source: Tenor

Savings.com.au's two cents

The segregated method of calculating how much of an SMSF’s income is exempt from tax arguably offers more tax benefits than the unsegregated method, although many funds are restricted to only using the latter. As with many things SMSF-related, it’s recommended you seek professional advice before making any major decisions - especially if most of this article didn’t make any sense.

Looking to take control of your retirement? This table below features SMSF loans with some of the most competitive interest rates on the market.

Update resultsUpdate
LenderHome LoanInterest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees LVR Lump Sum Repayment Additional Repayments Split Loan Option TagsFeaturesLinkCompare
6.99% p.a.
7.00% p.a.
$2,659
Principal & Interest
Variable
$0
$230
70%
Featured
  • Available for Purchase and Refinance. No application fee and no settlement fee
  • No monthly, annual or ongoing fees
  • Access your SMSF loan via our easy-to-use online app Smart Money
7.24% p.a.
7.25% p.a.
$2,726
Principal & Interest
Variable
$0
$0
70%
7.75% p.a.
7.83% p.a.
$2,866
Principal & Interest
Variable
$0
$995
80%
7.55% p.a.
7.94% p.a.
$2,811
Principal & Interest
Variable
$395
$1,920
80%
Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of . View disclaimer.

Photo by Matt Aylward on Unsplash 

Updated on 25 March 2024 by Denise Raward


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