When a relationship ends, splitting and rebuilding your super can be a challenge especially if divorce occurs later in your life. It may mean you have to work longer to rebuild your retirement wealth if you end up with a drop in income and personal assets.
But you can make things harder for yourself without really trying, especially if you have an SMSF and the trust deed provisions do not help with the split so they end up working against you and your ex. Other issues can arise when disposing of fund investments that are difficult to sell or when the fund records are incomplete.
Family law and superannuation
Family law generally applies to married, formerly married and de-facto couples. Your superannuation is treated differently to your other personal assets because you can split the super balance of you and your spouse as required under the splitting agreement.
If the agreement you reach with your spouse involves splitting super it will be made as part of either:
- A binding financial agreement / superannuation agreement between you and your partner, which includes a statement signed by a lawyer that both parties have received independent legal advice;
- A consent order to split superannuation, where both parties have agreed the financial settlement and consent to the order being made; or
- A court order, which will set out how the property of the marriage will be split if both parties cannot reach agreement.
It doesn’t matter whether the divorce is amicable or not, you and your partner will require one of the above agreements or orders, which will involve the assistance of a lawyer to undertake the legal work required.
What are the options?
About 93 per cent of SMSFs operate as one or two-member funds who are usually members of a couple. In the event of a marriage breakdown it’s important that you consider your options before a decision is made about dividing each partner’s assets including their super.
Three options are generally available:
- Take super into account but leave it untouched, with each member holding on to their own benefit;
- Flag the benefit, which is a freeze on the benefit at a certain point in time with the payment split or interest split being deferred until later. This is commonly used for defined benefit pensions which are not common in SMSFs; or
- Split the payment via a payment split or an interest split. With a payment split, the payment is split when the member has full access to the benefit (i.e. when they retire), with an interest split, the benefit is split at the time of divorce. It is more common that the super benefit is made as an interest split than a payment split because it allows the benefit to be dealt with immediately.
The process of splitting super under a family law settlement
You are entitled to request information about your spouse’s super provided the request is for purposes of the separation. It needs to be made in writing to the fund trustees and you will need to sign a declaration confirming your interest in the superannuation benefit and that you have a right to obtain the information.
In the case of an SMSF the spouse’s request for information can run into difficulties when the parties are going through a difficult and acrimonious divorce as information may be concealed about the SMSF by one of the parties. This could occur where one person has had a high level of involvement in the fund operation and the other party is passive.
The couple’s superannuation balances in the SMSF will be valued at a particular date for purposes of the family law legislation.
Superannuation as part of any settlement agreement
Any splitting agreement should include how superannuation for both members of the couple is to be treated. The agreement should be drafted with the assistance of an experienced family lawyer who has experience in SMSFs. Some members might have multiple member accounts such as an accumulation account and several pension accounts in the fund.
The agreement should take into consideration the taxable and tax-free components of each account as it may have future tax implications. It should take into consideration the fund investments and who they may be allocated to. For example, a fund may own a property and the agreement may be to a split of the value of the fund on a 50/50 basis. Any split will need to consider how the value of the property will work in practical terms and whether it will be sold or will be owned jointly.
The final agreement, consent order or court order
Any agreement or order will usually require action to be taken within a relatively short time to implement the instructions approved by the Family Court. Penalties can apply where the steps outlined are not implemented within the required timeframe.
Putting the family law split into action
Authorisations to operate the fund’s bank account and investments may require one trustee or director’s signature to authorise payments. As a matter of due diligence, it may be worthwhile to have any authority altered to ‘both to sign’ or ‘all to sign’ to reduce the likelihood of payments being made without agreement by both parties. While this may lead to a stand off in some cases it ensures that the money or investment remains intact.
A new SMSF?
Some agreements or orders may require the current SMSF to be wound up and the relevant spouse’s assets transferred to a newly-established SMSFs. This will require a decision being made on which assets will be transferred between funds to the extent of the transferring member’s balance.
One thing to be mindful of is that if the establishment of the new SMSF occurs prior to the approval of the settlement agreement or court order, any sale or transfer of assets between funds may involve a capital gains tax event. However, if the establishment of the SMSF occurs as part of the family law settlement agreement there will be no capital gains tax event on the transfer of assets between funds.
In addition, the assets transferred to the new fund must be able to satisfy the Superannuation Industry (Supervision) Act (SIS) investment standards after the transfer. This applies mainly to the application of the in-house assets rule where an in-house asset has been part of the transfer to ensure that once the transfer has taken place the fund will meet the five per cent rule.
Resignation of fund trustee/member
If one trustee/member is resigning from the SMSF, the fund’s trust deed should be reviewed to see what is required concerning the resignation of a trustee and member of the fund. In some trust deeds the consent of all members is required if the trustee or another member wishes to resign. This can be difficult where co-operation of the other member is required but not forthcoming.
Trusteeship of the SMSF
Once the trustee/member resigns from the fund, a review of the most appropriate trustee structure should occur. This may continue with the current structure or may require the appointment of another trustee or director in the case of a single member fund. It could also involve changing the type of trustee from an individual trustee structure to a corporate trustee or vice versa, depending on the circumstances.
Death benefit nominations
A review should be made of each member’s binding death benefit nomination or a nominated reversionary beneficiary to ensure they are consistent with the relevant member’s wishes subsequent to the family law split.
Superannuation benefit rollover statements
On transfer of the relevant assets between SMSFs the appropriate rollover benefits statement(s) should be completed so that the correct components of the departing member’s benefit are identified.
What to remember
The splitting of superannuation and family assets as part of a family law settlement is never easy even if the split is amicable. What must be remembered is that the legislation is designed to draw a line in the sand and let both parties get on with their lives. If this objective is kept in mind then both parties should end up with an equitable split of assets that allows them to go forward on a reasonable basis.
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