What happens to SMSF assets in a divorce?

SMSF technical expert and columnist for The Australian newspaper
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Decisions about how super benefits should be split in the event of a divorce can have long-term consequences for super fund members. And while some settlements may appear appealing, digging a little deeper may show that looks can be deceiving.

It’s only relatively recently that special super laws were introduced to allow assets to be transferred from one super fund to another in the event of a divorce. Ordinarily, such a transfer between related parties would be illegal.

As with all aspects of a divorce that goes before a court, it’s important to keep in mind that Australia’s legal system is a combative one and a lawyer’s job is to advance his or her clients’ interests. Some individuals, and even their advisers, might agree to super splitting arrangements that appear favourable, but in fact are not as good as they seem. So make sure you carefully determine whether a proposal suits your requirements.

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An SMSF with husband and wife members who are getting divorced will almost certainly involve one of the members moving to another fund. This may entail moving the market value of the departing member’s account balance as well as an agreed amount of their former spouse’s account balance. These are two different amounts and must be noted as such.

These payments require totally different reporting requirements and also will likely give rise to different income tax outcomes for the super fund. Make sure these super fund tax issues are sorted out with 100% accuracy so that one member doesn’t unfairly pay proportionately more tax than the other.

One common complex tax issue to solve is the capital gains tax (CGT) charged when your SMSF assets are sold or are deemed to have been sold.

In brief, over the last few years the CGT concessions available on super and divorce settlements have been expanded and there are now three broad exemptions available that apply to any asset transfer after June 2007, regardless of when the authorisations were signed.

If these exemptions are available, then the asset that is transferred is assumed to be acquired on the day when the original fund acquired it. Obviously, there will need to be a transfer of related records.

When the separating parties agree on how their collective assets should be split, the court will confirm this arrangement. If an agreement can’t be reached, then the court can choose how the assets should be split.

One possible way to negate the need to use these splitting provisions is to create a Binding Financial Agreement. These agreements, which must be in writing, can be made before, during and even after a marriage. These agreements can be set aside by the court.

All the above caters for married couples. But what about those involved in de-facto relationships?

Similar rules have applied since March 2009 in New South Wales, Victoria, Tasmania and Queensland because these State Parliaments gave the Commonwealth Parliament power to regulate the fair and equitable split of a de-facto couple’s assets. Residents of the Northern Territory and the ACT are automatically covered by any Federal legislation.

The super splitting laws are strict and if they are breached, penalties may be imposed. Ideally, you should seek legal assistance as well as clearly determine how super splitting will affect your retirement.

For instance, what are the implications of keeping most of your super if you have nothing to live on? And are there any estate planning or social security implications?

Your SMSF’s members should get financial advice from those experienced in dealing with the super divorce rules from a personal financial planning perspective. Anyone providing this advice should be appropriately qualified, licensed and experienced.

Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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