Understanding the laws around self-managed superannuation funds is complicated, especially when divorce is involved, so get good advice from a professional.
SMSF members are pretty good at planning for the two great certainties in life – death and taxes. But managing the impact of a marriage or relationship breakdown on a self-managed superannuation fund is generally not done so well.
That could be because about half of SMSF members are over 60 and divorce is less common at older ages. But that doesn’t change the fact that when it does happen, there are some important steps in dividing up what will inevitably be one of the couple’s big assets – their SMSF.
The rules about splitting super are not always well understood.
Superannuation (in any fund) is one of the many assets that are considered “property” and can therefore be formally divided as part of a divorce. The same applies to the breakdown of a de facto relationship in all states except Western Australia.
The way in which this must be done is set out in legislation (the Family Law Act) and the normal super law contains specific rules that allow funds to re-assign some or all of one person’s super to another (their soon-to-be-ex spouse or partner).
This is an important set of rules. Without them, it would really be possible to split up a couple’s super only if they waited until they were old enough to access it.
While these rules are valuable, they don’t always operate brilliantly and are not always well understood.
Three common mistakes or misunderstandings come to mind.
First, people often assume that if they are separating without getting the courts involved (for example when there are no children), they can just make their own arrangements when it comes to super. Unfortunately, that's not the case.
Tip one: get proper legal advice and documentation before splitting up super.
Super can be “split” using the relationship breakdown rules only if it’s done in accordance with the right legislation – this will mean either making a binding “Superannuation Agreement” (which has a range of legal requirements) or having orders made by a court. Simply deciding, amicably, that “Bob can have the SMSF” isn’t enough. Tip one: get proper legal advice and documentation before splitting up super.
A second common misunderstanding is that the lawyers involved in advising on the split of a couple’s financial assets will be as knowledgeable about super as their accountant or financial adviser.
Again, this is not always so. The divorce lawyer will no doubt do an excellent job at making sure the client gets “enough” of their ex’s super balance. But there are other issues the lawyers often miss.
Just one of these is capital gains tax. A simple example I bumped into in practice was the separation of Grace and John.
Very roughly, Grace’s super balance was worth 25 per cent of their SMSF and John’s was 75 per cent. Their court orders resulted in some of John’s super being transferred to Grace so that the fund was split equally between them.
The plan was then that Grace would move her super to another fund and take half the SMSF’s assets with her. They had decided (and this was reflected in the court orders) that this would be all the shares owned by the fund and some cash. This left John with a property the fund had bought many years ago and some cash.
When it comes to capital gains tax, there are fortunately special rules that allowed Grace to take those shares without tax being triggered at the time the fund is split up. Instead, her new fund will pay tax when the shares are eventually sold.
What neither they nor their lawyers had worked out was that the shares had all been bought quite recently. That meant Grace could sell them (in her new super fund) without paying much tax. By contrast, their SMSF had owned the property for many years. If John’s SMSF sold the property, there would be a lot of capital gains tax to pay, which would eat away at his super balance.
Tip two: get an accountant involved to make sure the split is fair in the broadest sense.
In other words, what felt fair at the time would feel manifestly unfair (to John in particular) as soon as either of them decided to sell their share of the assets. Tip two: get an accountant involved to make sure the split is fair in the broadest sense.
Finally, remember that the normal rules about accessing super still apply. Key here is that most super these days is “preserved”. That means it’s generally unavailable until the individual is in their late 50s at the very least. And once it’s split, it is the age of the “new owner” that’s important.
Tip three: while there’s nothing that can be done about preservation, remember to plan for it.
In a recent case, our client James, 60, split his super with his much younger wife (Jenny, 45) after their relationship broke down. What they hadn’t thought through was that James was close to retirement. He could start using what remained of his super to meet his living costs very soon. Jenny, on the other hand, had at least 15 years ahead of her before the super could be accessed. Tip three: while there’s nothing that can be done about preservation, remember to plan for it.