Neurons are highly polarized cells with distinct protein compositions in axonal and dendritic compartments. Cellular mechanisms controlling polarized protein sorting have been described for mature nervous system but little is known about the segregation in newly differentiated neurons. In a forward genetic screen for regulators of Drosophila brain circuit development, we identified mutations in SPT, an evolutionary conserved enzyme in sphingolipid biosynthesis. Here we show that reduced levels of sphingolipids in SPT mutants cause axonal morphology defects similar to loss of cell recognition molecule Dscam. Loss- and gain-of-function studies show that neuronal sphingolipids are critical to prevent aggregation of axonal and dendritic Dscam isoforms, thereby ensuring precise Dscam localization to support axon branch segregation. Furthermore, SPT mutations causing neurodegenerative HSAN-I disorder in humans also result in formation of stable Dscam aggregates and axonal branch phenotypes in Drosophila neurons, indicating a causal link between developmental protein sorting defects and neuronal dysfunction.