When a relationship ends, splitting and rebuilding super can be difficult, especially if it happens later in life. Here are some things to know and things that may help make a fair and reasonable division of super.
Family law and superannuation
In the event of a relationship breakdown, the treatment of super is governed by the Family Law Act 1975, which generally applies to relationships including married, formerly married and de-facto couples.
Getting info about a spouse’s super
Each member of a relationship is entitled to request information about their partner’s super, provided the request is for purposes of a separation. Any request must be made in writing to the fund trustees – and a declaration needs to be made by the individual requesting the information that they have an interest in the superannuation benefit and they have a right to obtain the information.
In fairness, these requests can be tough, particularly in the face of a bitter divorce, where one party wants to conceal information, and where one person has been much more proactive than the other in managing the finances.
Dividing your super
The law enables superannuation belonging to the couple to be divided, although any part of the split will continue to be subject to the normal superannuation rules, such as preservation, taxation components and conditions of release.
There are three formal methods enabling super to be separated, all of which require the involvement of lawyers:
- A binding financial agreement, which includes verification by a lawyer that both parties have received independent legal advice.
- A consent order, which is a written agreement approved by a court with the orders made with consent of the parties.
- A court order, which is an order made by an officer of the court and sets out how the property of the marriage will be split if both parties cannot reach agreement.
Each member of the relationship has options in terms of the actual division of the superannuation money. This may include:
- Taking super into account but agree to leave it untouched, with each member retaining all of their superannuation benefit.
- Flagging the benefit, which freezes the benefit at a point in time, which requires it to be paid at a later date. This is commonly used for defined benefit pensions, which are not as common in SMSFs.
- Arranging a superannuation split which occurs once a member has full access to their super, typically when they retire.
- Agreeing on an ‘interest split’, where the benefit is split once the order has been made by the court.
Minimise the risk of disputed transactions
It may be wise to implement a process that requires joint sign-off on fund decisions and payments. This could be done as part of an agreement/order. This process is probably not a bad thing to implement in any event, whether there is a relationship breakdown or not.
Superannuation as part of a settlement agreement
Where a settlement agreement is to be made, it should cover superannuation and how it is to be treated. The agreement should be drafted with the assistance of an experienced family lawyer who has a sound knowledge of how SMSFs operate.
It may be the case that a member has multiple accounts within an SMSF, such as an accumulation account and one or more pension accounts. Any settlement agreement should take into consideration the taxable and tax-free components of each account as it may have future tax implications.
The agreement should also include the fund investments. For example, a couple may seek to split the fund on a 50/50 basis, yet the fund may own a property. Here, an agreement should consider the property in practical terms, such as whether the asset will be sold or whether it may continue to be jointly owned after the split.
A new SMSF?
Some agreements/orders may call for the establishment of a new SMSF for one or both spouses, and for assets to be divided and transferred between funds.
This will require a decision being made on which assets will be transferred between funds, in line with each person’s member balance (and/or agreed entitlement).
One thing to remember is timing. In the event the transfer of assets between funds is done incorrectly, then CGT apply may apply to the transfer. If it is done correctly, no CGT should apply as the capital gains tax event on transfer is disregarded.
Any assets transferred to the new SMSF must be able to satisfy the SIS investment standards. These place a cap on in-house assets that a fund can hold which is limited to no more than 5% of the fund’s total holdings after any transfer in satisfaction of the family law agreement or court order.
Resignation of fund trustee
If one trustee or director of the corporate trustee is resigning from the SMSF, the agreement or court order should set out how the resignation is to take place as well, as the relevant provisions of the fund’s trust deed. In some trust deeds the consent of all members is required in respect to the resignation of a trustee or director. This of course may be difficult in an acrimonious environment.
Once the trustee resigns, the trustee structure should be reviewed. It may be possible that the current structure continues together with the appointment of another trustee (or director). It may also be appropriate to change the structure from individual trustee to 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 nominated reversionary beneficiary to ensure the nomination is consistent with the relevant member’s wishes after the family law split has been put in place.
Superannuation benefit roll-over statements
On transfer of the relevant assets between SMSFs, the appropriate rollover benefits statement(s) should be completed. This should assist in identifying the correct preservation and taxation components of the departing member’s benefit.
What to remember
The splitting of superannuation and family assets as part of a family law settlement is never easy, even if the separation is amicable. What must be remembered is that the legislation is designed to draw a line in the sand, provide for fair and equitable split of assets and let both parties get on with life in the best way possible.
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