By Graeme Colley

They have an SMSF but are quite different. He: older, retired, larger balance, favours growth assets. She: younger, working, smaller balance, conservative investor. So, can they have separate investments within the fund? The answer is ‘yes’ – but there’s a level of complexity and a few things to consider.

What does the fund’s trust deed say?

If you wish to allocate investments among SMSF members, it must be permitted by the fund’s trust deed. The deed should say something along the lines that the trustee, as agreed with the member, may acquire or allocate investments for the member’s benefit, providing it is consistent with the fund’s investment strategy. The deed may also say that the investment will be held for the specific benefit of the member and recorded in the member’s account. This will allow the investment to be segregated from other fund investments held for other members and those held for general fund purposes.

The transfer of the investment from the member’s account may be subject to their approval. In addition, the deed may say that no other member may obtain an interest in the investment unless it is transferred to the member for purposes of paying a benefit or the asset is sold to pay a benefit.

What does the superannuation law say?

The legislation permits you as an SMSF member to direct the trustee in exercising their powers under the trust deed. This can include directing the trustee how, when and where your benefits are paid, or directing the trustee to acquire and dispose of investments.

Are there any drawbacks with investment allocation?

Separating assets may keep you happy as a member as you know exactly which investments ‘belong’ to you. However, there are a number of things to consider – mainly accounting-related issues associated with the allocation of income, expenses and tax.

The fund’s taxable and tax-exempt income can be calculated by using either the unsegregated/proportional method, or in some cases the segregated method (learn more). The fund can claim a tax deduction for expenses which relate to its taxable income, as well as special deductions unique to superannuation. Also, any tax credits from income earned by the fund, whether taxable or tax-exempt, can be applied against the tax payable by the fund. Therefore, to be accurate in calculating the net income, a separate income calculation based on the investments allocated to each member’s account may be required.

The other drawback relates to the cash flow of the fund and its ability to pay benefits and expenses when they become due. Where investments are separate and the fund’s cash flow is not being properly managed, a member’s investment allocation may not be able to make pension payments as required. So, a degree of skill and care is needed here.

Case study: Sophie and Logan

Sophie and Logan have an SMSF, the Logie Superannuation Fund. The fund’s trust deed allows members to select investments as agreed with the trustee. Sophie, who is in accumulation phase, is a more conservative investor and has selected term deposits. Logan, who is in retirement phase, is a more aggressive investor and has selected ASX listed shares which are fully franked.

The fund is using the unsegregated/proportional method to calculate its taxable and tax-exempt income. As 50% of the fund’s investments are in retirement phase, 50% of the fund’s total income is taxable. 

During the year the fund earned $30,000 interest from term deposits and $35,000 in dividends with franking credits of $15,000. The fund will pay 15% tax on its taxable income of $40,000 (50% of the fund’s total income of $80,000) which is $6,000.  After applying the franking credit of $15,000 the fund will receive a tax refund of $9,000. This means that the franking credit received on Logan’s shares has been used to pay the tax earned on Sophie’s term deposit in the fund as well as part of his selected investments.

This can be illustrated in the following table:

What needs to happen:

• With the tax payable by the fund, an adjustment will be required to Sophie’s account balance to reduce it by the amount of tax that should have been paid on the income earned from the term deposit ($4,500).
• Logan’s account balance should be adjusted to take into account the amount the fund has received from the franking credits less tax paid due to the proportion of the fund in retirement phase and in accumulation phase. 

Summary – what you need to consider 

If you’re looking to separate investments within an SMSF, here’s what to consider:

• Does the fund’s trust deed and investment strategy allow member investment choice?
• Are there good reasons to split the investments?
• When allocating income on the investments for each member’s account, are expenses allocated on an agreed basis?
• When calculating the taxable income for the fund, are adjustments made to the members’ respective accounts to take into account franking credits, permissible tax deductions and other expenses?

And finally … another option to consider

You could always have two SMSFs, one for each member. This could have the same effect as investment separation within a single fund, but with less complexity.