The breakdown of a marriage or relationship and subsequent split of assets is always a challenging period. If assets are held within a self-managed superannuation fund, splitting this asset can be complex and extra consideration and care needs to be taken.
This article provides a brief summary of some of the key factors to consider when undertaking a superannuation split in a self-managed superannuation funds.
What is a self-managed superannuation fund (SMSF)?
If you have self-managed superannuation fund it is a private superannuation trust fund that you manage and oversee including choosing investments and ensuring that the fund complies with superannuation and tax laws. It is established under a trust structure and must operate for the sole purpose of providing retirement benefits for its members.
SMSFs are usually comprised of a diversified asset class including shares, investment income, real properties, and cash. This is common as it is prudent to have a diversified asset class in an SMSF so that the fund is not exposed to the vagaries of a single asset class.
Considerations for Splitting SMSFs
When splitting a SMSF in the context of a family law separation, there are a number of essential matters to keep in mind.
Documents
When splitting a SMSF, in order to take into account a thorough consideration of the SMSF, the following documents should be obtained:
A copy of the most recent up to date Trust Deed.
Register of Complying Superannuation Funds (RoCS) Search: This a register and search that can be undertaken via the Australian Tax Office (ATO) website to determine whether the fund has been registered as a complying fund.
The last three most recent years of financial statements. These statements will assist to understand the nature of the assets held by the fund and its estimated financial position. It also provides insight as to whether the fund has been audited and areas of concern as to compliance.
Member Statements.
Valuation
When considering any superannuation split, determining the value of the superannuation interests is a vital step. Most SMSFs will have investments such as real property, cash or listed shares which are relatively straightforward to value. However, some funds will have acquired more difficult assets to value such as collectables, antiques or units.
The financial statements of the fund often document the values of the asset classes held by the fund. However, the financial accounts are not always up to date, and the values document cannot necessarily be solely relied upon for a number of reasons:
The financial statements are usually prepared annually, and the values ascribed to the assets as at that date may not be appropriate for your matter.
There may be a dispute about the value of certain assets such as real estate which may not include market values. If so, these should be valued by an expert valuer.
The financial accounts may contain reserves, where some of the fund’s assets have not yet been allocated to its members.
Interest on dividends could have accumulated and taxation and other expenses in the fund incurred since the financial statements were prepared.
Tax Implications
There may be tax implications depending on what constitutes the transfer value. Non-complying funds potentially have tax liabilities and ATO penalties. An asset may have latent Capital Gain Tax (CGT). For example, if a transfer is undertaken by cash in circumstances where the SMSF is forced to sell investments (i.e shares or real property) to implement the cash transfer, then the SMSF will be subjected to CGT on any capital gains made. CGT rollover reliefs provisions may also be available in certain situations to reduce or eliminate CGT where there is a transfer of assets in specie between SMSFs, meaning a transfer of assets in its actual form without selling the underlying asset.
A strategy should be devised with the benefit of specialised tax advice when considering splitting options so there is an understanding as to the tax position which might ultimately influence parties decisions to either roll out their interest into another SMSF or an industry regulated fund.
Membership and Restructure of the SMSF
If you are a member of the SMSF, you are also a trustee. As a trustee, you have ongoing responsibilities and need to decide if you wish to remain in the SMSF, commence a new SMSF or open to a different type of fund such as an accumulated regulated fund. The decision as to what is appropriate will vary from case to case.
Inevitably a splitting of the SMSF will typically involve a restructuring of the fund so to comply with superannuation regulations and laws. For example, as a person cannot be a single trustee and member, a restructure to include a corporate trustee may be needed. Similarly, the restructure may involve one of the member spouses resigning as a director of any corporate trustee.
Types of Spitting Orders
A payment split of superannuation interest may be made in a financial agreement or by a court order.
There are generally two methods that a superannuation interest can be split that being as a specific dollar amount (base amount) or as a percentage of the balance of the superannuation entitlements. A base amount payment is the most commonly used, as it guarantees the amount that a non-member spouse will receive from the split, while a percentage split may be higher or lower than the estimated value of the interest, depending on the value of the interest when the Trustee of the Fund gives effect to the Order made by the Court. The circumstances of each matter will dictate whether a base amount or a percentage split is more appropriate. While base amounts have historically been preferred, given the recent uncertainty and volatility in the share market at present due to the novel COVID-19 virus, the current economic circumstances dictates that any superannuation splitting orders included in agreements should strongly consider expressing splitting orders as a percentage at the time of the split rather than using a base amount.
Once the superannuation interest becomes subject to a payment split, the non-member spouse generally has one of the following options in respect of the interest:
- create a new interest in the same fund –– this option however may be precluded under the SMSF Trust Deed and generally not recommended if the separation is acrimonious;
- transfer or rollover the interests into another complying fund including a new SMSF or industry regulated superannuation fund. Assets of the funds may have to be sold if there is insufficient cash to be rolled over into an accumulation fund if the non- member spouse does not wish to set up another SMSF; or
- receive the amount as a lump-sum payment if the non-member spouse has met conditions of release under superannuation laws.
Once the non-member spouse has made a selection in relation to how the superannuation interest should be split, the SMSF trustee generally has an obligation to give effect to that choice.
Superannuation splitting rules are complex. It often needs the advice of accountants, financial advisers and family lawyers working collaboratively to determine what options are feasible under the various rules and regulations, to determine how best to structure a proposed split from a superannuation law and tax perspective.
Contact one of our family lawyers today to gain expert advice in relation to your SMSF and family law property settlement.