SMSFs: Segregating assets in retirement phase

As the name suggests, segregation refers to the separation and allocation of specific fund assets to specific fund members or class of fund membership.

Whether it be for investment or tax purposes, asset segregation can provide significant benefits for SMSFs.

What is asset segregation?

Put simply, asset segregation refers to the process where the SMSF trustees identify a particular fund asset as being held solely and separately for a particular fund member or class of members.

Asset segregation is most commonly used where an SMSF has fund members in both the accumulation and retirement phase of superannuation.

For instance, trustees could resolve that all the shares their SMSF holds in BHP are being held solely for one member of the fund, or that they are being held for all members who are in pension/retirement phase.

The reason that segregation is used more often for retirement phase members relates to the tax treatment of fund earnings in retirement phase when all fund earnings become tax-free.

If an asset is identified as being segregated and held solely for retirement phase members, then all income generated by that asset is allocated to the members in retirement phase, making the income entirely tax-free to the fund.

Asset segregation can also be used in the accumulation phase for investment purposes. For instance, where different SMSF members have different investment objectives or preferences. One member may want to invest their retirement savings in direct property, while another member may want to invest entirely in listed shares.