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Re: Identifying individual member assets

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Initiate

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I feel that I am about to ask a rather dumb question but ,anyway, I am among friends so here I go.

Up until this year our SMSF has always operated under the segregated method and the software I have used allows for the pooling and identification of individual member assets with individual asset returns linked to the asset "owner".

I undestand the difference between segregating assets for investment choice and the mandated need to use the proportionate method to calculate ECPI when a member's total super balance exceeds $1.6m and is in retirement phase.My software does not allow for segregation of assets when proportionate method for calculating ECPI must be used.( I know the flippant answer will be to change software!)

My basic question is, for those who have been using the proportionate method, how do you identify the member's "worth" at the end of the financial year if assets are not segregated i.e. is the overall/net growth simply apportioned based on percentage of fund owned at the end of the previous year? 

 

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Anonymous

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@Lesleeg  @Bruce4Tax 

 

A third party blog covers the issue or segregating accumulation assets and I can see why Bruce holds his veiws, but in reality segregation can be for pension assets or accumulation assets or a combination of both ...

 

https://www.heffron.com.au/blog/article/is-segregation-really-just-about-pension-accounts-or-can-acc...

 

Also have a look at some of the examples in this ATO Determination, in particular the examples that discuss funds with members in both accumulation and pension phase.

 https://www.ato.gov.au/law/view/document?docid=TXD/TD20147/NAT/ATO/00001

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Anonymous

Replies 0

Hi @Lesleeg 

 

I think you have basically worked it out yourself and one way you can do it is to simply set up a excell spreadsheet and work it out manually or with formulas so it works everything out for you when you insert the members opening balance for that financial year. Then you just keep using that spreadsheet for all future years. 

 

If using formulars you can use one like =ROUND((C12*21.6818651%),2) 

in this example " C12 "  represents the cell that contains the member's opening balance, and as you would know the percentage can be changed to whatever you want, and this formula auto rounds the result to two decimal points.

 

Not sure why you can't keep using your software for working out member's accrued benefits at end of financial year, because the point of obtaining an acturial certificate when having to use the non-segregated method is to simply determine the correct ECPI that the fund can claim for that financial year, and no other purpose.   

 

The way I see it, how the fund allocates income and expenses between different members is up to the Trustee, and provided all member's agree and everything  is properly documented there really shouldn't be a problem.  I have recently discussed this with one of the largest Acturial Certificate providers and they agree, and also I am currently awainting a response from another party. 

 

A few months ago I was talking to someone from the ATO TBAR development team and an indication was given that consideration was been given to dropping the requirement to obtain an acturial certificate for all members of a fund once a member had reached $1.6m in retirement phase even if still using the segregated method, but haven't heard anything since.   Maybe its in the pipeline.

 

@Bruce4Tax may have some usefull opinions on this issue ...

Devotee Registered Tax Practitioner

Replies 8

My basic question is, for those who have been using the proportionate method, how do you identify the member's "worth" at the end of the financial year if assets are not segregated i.e. is the overall/net growth simply apportioned based on percentage of fund owned at the end of the previous year? 

 

I am not sure that I understand what the problem is.  I run all my funds without segregation, and all member balances are determined by:

 

Opening balance + (contributions, transfers in) - (transfers out, pensions, specific member expenses) - contributions tax - allocation of net income       =  Final balance.     

 

The calculations and allocations are are done by software.

 

Some members have multiple accounts because they have pensions, so not all items are applicable to a particular member account.

 

There is one fund where the members have resolved to allocate assets to members, but the assests are only property and bank accounts, so it is easy to reconcile each member account balance to the assets supporting it.  Both members have TSB in excess of $ 1.6 M.

 

Please advise if I am looking at the question from the wrong direction.

 

Also, the fund auditor should have an opinion about this.

Initiate

Replies 7

Thank you MVF and Bruce4Tax for your responses.I sincerely appreciate your  involvement/information.

If I break down my enquiry to it's simplest form what I am trying to understand is how the "allocation of net income" occurs for individual members of a fund under the proportionate method. I believe the proportioning aspect is to do with ECPI and taxable income but remain confused about identifying individual members assets and apportioning net growth/decrease.

A simple example to illustrate: under segregation a member has $100,000 invested returning,say, 4% and another member has the same amount at 3%.  Segregation would give member one  $4000 income and the other member $3000 and they would have different balances at the end of the year ($104,000 vs $103,000). My question is, if the assets are not segregated does each member's balance increase by $3500? (I have deliberately ignored the "net income" aspect and the fact that individual members will have different starting balances, to simplify my enquiry.)

 

Anonymous

Replies 5

Hi @Lesleeg 

 

I beleive their may be some confusion here in regards to the ECPI requirements for a fund that has a member in pension phase with a TSB of at least $1.6 million (from all super funds).

 

In this situation a super fund is only required to use the proportionate method (Acturial Certifcate) for ECPI purposes.  From my understanding of what the ATO have published, there is absolutely no need to change from Segregated Assets Method to Non-Segregated Assets Method for any other purpose.   

 

The ATO make this clear on their website MethodsforcalculatingECPI

Quote from the last paragraph under the heading of  " When a SMSF must use a particular ECPI calculation method "

 

" This change only limits a SMSF to using the proportionate method for the purposes of calculating ECPI. It does not limit a fund from segregating its assets to accommodate member investment choices. Nor does it reduce the amount of ECPI a fund is able to claim, it just means the amount is calculated using the proportionate method. "

 

This I beleive means that you can continue to do what you have always done and this is use the Segregated Assets method, and the only exception is when it comes to calculateing the ECPI.

 

Hope this helps ...... 

 

 

 

Devotee Registered Tax Practitioner

Replies 0

Segregation would give member one $4000 income and the other member $3000 and they would have different balances at the end of the year ($104,000 vs $103,000)

 

Segregation does not do this.  To get this result you need to allocate assets to members, which you can do in any fund with or without segregation because "segregation v proportionate" deals with how the fund determines ECPI.  If there are no pension members, there can be no segregation.

 

You need to view income and tax as a 2-step process.

 

1.  determine the income and allocate it to each member's interests according to equitable principles

 

2.  if there are retirement phase income streams, determine the tax to be paid according the rules for ECPI  ( where segregation kicks in )

 

A fund can be segregated for part of the year and proportionate for the rest of the year  -  see details on Accurium and Heffron web sites.

 

My question is, if the assets are not segregated does each member's balance increase by $3500?

 

If assets are allocated to each member, then the income arising from those assets would also be allocated to each member.  This is about members documenting their decision to allocate, e.g. investment strategy,  then ensuring that the financial statements reflected that decision.  If assets are not allocated to members, then income is allocated in proportion to member balances.

 

Think about it this way  -  if there were no pensions then there could be no segregation => by definition.  You still have the issue of you you are going to allocate income to members.

 

Devotee Registered Tax Practitioner

Replies 4

It does not limit a fund from segregating its assets to accommodate member investment choices. Nor does it reduce the amount of ECPI a fund is able to claim, it just means the amount is calculated using the proportionate method.

 

I have seen this on the ATO website, and I feel that they could have been more careful in their choice of words.  In this context, they really mean "allocating assets to members." 

 

Full details are on all the actuary websites.

 

 

Anonymous

Replies 3

@Bruce4Tax 

 

I hear what your saying Bruce, but in my opinion it doesn't read that way that is " allocating assets to members ".

 

If it was about how assets were to be allocated to members then it would have been legislated but its not and also the EM does not even suggest that.  

 

I spoke with one of the largest Acturial Cerficate providers about this in the context of allocating expenses and the ECPI and their opinion was that how the expenses were allocated to members was up to the fund, providing the trustees and all members were in agreement.

 

It is very poor wording on their website.

 

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Initiate

Replies 2

Thank you both for your further posts.

Bruce, let me challenge your basic point to see how the discussion develops.

Why doyou say that you can only have segregation in pension phase?I have always used the term as synonymous with allocation of assets. Indeed the ATO talk about allowing segregation of assets while requiring the fund, in certain circumstances to use the proportionate method to calculate ECPI. They are surely drawing a distinction here between how assets are held (segregation) and how tax liability is calculated?

In all my research I have never seen a reference to only using the term when in pension phase. Indeed prior to moving to pension phase the software and auditor always categorised our fund as operating on the segregated method I.e. assets were allocated to individual members.

Thanks, again to you both

Best answer

Anonymous

Replies 1

@Lesleeg  @Bruce4Tax 

 

A third party blog covers the issue or segregating accumulation assets and I can see why Bruce holds his veiws, but in reality segregation can be for pension assets or accumulation assets or a combination of both ...

 

https://www.heffron.com.au/blog/article/is-segregation-really-just-about-pension-accounts-or-can-acc...

 

Also have a look at some of the examples in this ATO Determination, in particular the examples that discuss funds with members in both accumulation and pension phase.

 https://www.ato.gov.au/law/view/document?docid=TXD/TD20147/NAT/ATO/00001

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