The coronavirus pandemic has taken its toll on Australian couples. As well as
marriage rates continuing their 20-year decline, divorce is reportedly on the rise.
Google searches for the term ‘divorce’ surged to their highest point in 12 months at the end of June, even higher than the traditional Christmas divorce season.* Family law firms also reported an increase in new business to initiate divorce proceedings during lockdown.
In most Australian states, superannuation, including super held in SMSFs, is generally considered property that can be divided just like other assets when a marriage or de facto relationship breaks down.
For those SMSF members heading towards a divorce, there are far reaching consequences and the process of dividing super can be complex, with conflicts that must be carefully managed.
This is also a time when good advice makes a huge difference. Lawyers and the courts are well versed in dividing up assets but often it’s understanding the nuances of superannuation and tax law that is key to getting the best possible outcome when an SMSF is involved.
Divorce or relationship breakdown is one of the few times when it’s possible for one person’s superannuation to be moved (or split) to someone else. But remember, this is only the case if the super is formally split via a superannuation agreement or court orders. A couple can’t just decide this between themselves.
The split can be done immediately (i.e an existing balance is divided up) or in the future when payments are made from it (i.e, there’s an agreement to divide up future payments such as pensions and these are split between the (ex) couple each time a payment is drawn).
When it comes to SMSFs, usually it’s the former - the balance is divided up and the person receiving some of their ex-partner’s super (called the “non member spouse”, even if they are actually also a member of the SMSF) has some choices to make about what they do with the amount they receive. Subject to any specific requirements of the superannuation agreement or court orders, they can move it to another fund, leave it in the existing SMSF or (if they are at the age where they are already allowed to access their superannuation) they can take it out of super.
For SMSFs and their advisers, there are four tips that will help this process run smoothly. These should be discussed and decided while the superannuation agreement or court orders are still being prepared so they can achieve what the clients actually want.
Tip 1: Decide in advance who will go and who will stay in the SMSF.
The first consideration is whether both parties remain in the SMSF or if one party is to leave. Commonly, someone will leave the fund which inevitably raises the next challenge - deciding how assets within the SMSF will be distributed or sold to create liquidity for a payout.
SMSFs with major assets that are not easily divided (eg a property) can present difficulties here and prevent the couple from effectively separating their financial affairs.
It might make more sense, for example, to leave one party with more of the couple’s superannuation (and adjust the treatment of other assets to reflect this) if it allows that member to keep a particular asset entirely. The key when it comes to SMSFs is to look beyond simply the value of the member’s balance and consider how the assets themselves should be divided. It is crucial to think about this at the time the relevant agreements or orders are being settled rather than later.
Tip 2: Update members’ account balances and understand the CGT position
It is essential to update member balances to market once it is agreed which member is staying or going and whether any assets will be sold for cash or transferred to another fund.
It is also vital to understand and allow for capital gains tax that will be paid either immediately (because the assets have been sold) or in the future (because they have been transferred to a new fund and the leaving member is entitled to special relief on CGT that applies under these circumstances). Many couples value the special relief as it means they don’t need to pay tax on the gains built up so far until the asset is actually sold for cash. But remember, these assets will be sold eventually. At that point, whichever fund owns them at the time will have to pay CGT on both the gains achieved in the new fund and the gains built up before the transfer.
Beware of one extra trap that is easy to fall into. Many funds with pensions in place before a major rule change in 2017 have some special CGT amounts linked to gains built up before 30 June 2017. Normally, tax is paid on these amounts when the asset is sold. Unfortunately, this particular tax also has to be paid if the assets are transferred to another fund even as part of a divorce, it can’t be just rolled over to the new fund like other capital gains. This will be paid by the original fund and should be factored into the relevant calculations.
Tip 3: Think about tax and preservation components, not just the amount of the split
The splitting rules require that the amount received by the non-member spouse is
divided between tax and preservation components in the same proportions as the
There are some important factors to consider here.
If the two members have very different tax or preservation components, it might actually make more sense to have two splits – one each way – to allow them to end up in identical positions.
Secondly, think carefully about how to handle cases where the member spouse has multiple superannuation interests. If the tax or preservation components of the different interests vary considerably, it may be worthwhile specifying the interest from which the split is to be paid as well as the amount or proportion.
Tip 4: Get your documentation right
Documentation is critically important. Unfortunately, this doesn’t end with the court orders or superannuation agreement – there is vital documentation to be prepared by the SMSF itself. As usual with superannuation, there is specific information that must be included and deadlines.
There’s no substitute for expert advice around SMSFs with so many factors to be considered. All parties must be fully aware of the law and their responsibilities. It is a difficult time, but good advice is key to success.