John and Linda have an SMSF. He’s 65 and just retired. She’s 55 and thinks she’ll work for as long as possible. John’s balance is big, while Linda’s is small.  He’s a growth investor and likes overseas equities. She is conservative and likes onshore investments.  Then their two children become members…

Whatever way you look at it, there are many aspects to consider when it comes to the fund’s investments and its investment strategy.  In the situation above, members may wish to split the fund’s investments to see exactly where their superannuation balance is invested.

What can you do if you have one SMSF but want separate investment allocations and have different investment strategies in the one fund?  Can you do it?  The answer is ‘yes’ but there are a number of things to consider, as it can be complex.

What does the fund’s trust deed say?

If you wish to allocate investments in an SMSF among the members, it must be authorised 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 purposes of the fund.

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?

Where an SMSF is involved, the superannuation legislation permits you, as a fund member, to direct the trustee when exercising any of their powers under the trust deed.  This can include directing the trustee how, when and where your benefits can be paid or directing the trustee for the acquisition and disposal of investments in terms of the trust deed.

Are there any drawbacks with investment allocation?

The allocation of investments may keep you happy as a member as you know exactly which investment supports your account balance(s), but there are a number of things to think about.  These are mainly around accounting issues associated with the allocation of income, expenses and tax.

The taxable and tax-exempt income of the fund can be calculated by using the proportional basis, which is calculated on the proportion of the fund’s total investments, which are providing pensions in retirement phase.  It is also possible to use an unsegregated basis, which calculates the income earned by the fund investments in retirement phase and not in retirement phase.  The fund can claim a tax deduction for expenses that relate to its taxable income and special deductions, which are unique to superannuation funds.  Also, any tax credits from income earned by the fund, whether taxable or tax exempt, can be applied totally 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 can be the structuring of the fund’s investment strategy and ensuring the cash flow of the fund can pay benefits and expenses when they become due and payable.  This can turn out to be complex and if 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.

Here’s a case study

Let’s look at a simple example.  Sophie and Logan have an SMSF, the Logie Superannuation Fund.  The trust deed of the fund 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 proportional basis to calculate its taxable and tax-exempt income and 50% of the fund’s investments are in retirement phase, which means that 50% of the fund’s total income is taxable.

During the year, the fund has earned interest of $30,000 on its term deposits and has been paid dividends of $35,000 with franking credits of $15,000.  The fund will pay tax of 15% on $40,000 (50% of $80,000), which is $6,000 and receive a tax refund of $9,000, after application of the $15,000 franking credit.  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.

In view of what has occurred 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). And 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.

Use this checklist

If you and any other member wished to select investments in the fund, here’s what you need to consider:

1. Does the fund’s trust deed allow member investment choice?
2. Are there good reasons to split the investments based on member investment choice?
3. Does the investment strategy recognise member investment choice?
4. When allocating income on the investments for each member’s account, are expenses allocated on an agreed basis?
5. When calculating the taxable income for the fund, are adjustments made to the member’s accounts to take into account franking credits, tax deductions unique to superannuation funds and other expenses?

Something to think about…

You could always have two SMSFs, one for each member, which could have the same effect to avoid any conflict or controversy that could arise.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.