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The breakdown of a marriage has wide-sweeping financial implications, including for the members of a DIY fund. We look at what needs to happen if assets are to be split.
The process of dividing assets in a self-managed super fund (SMSF) is often complex given the personal dynamic of the fund’s trustees and members. It’s also important to understand a divorce has no impact on the ongoing obligations of the fund’s trustees: they’re still required to act in the interests of all members of the fund.
“This can lead to severe conflicts of interest that need to be carefully navigated,” says Jordan Vaka, a financial adviser with Make a Financial Difference.
The SMSF’s investments form part of the matrimonial pool of assets to be divided on divorce or separation, and both parties need to work out a just and equitable split of these assets.
“Generally, if parties have a relatively equal superannuation balance and a similar earning capacity, the parties may retain the superannuation which they hold in their sole name,” says Eleanor Lau, partner at Landers & Rogers Lawyers. This is often the case where there are sufficient other assets within the matrimonial pool to be divided to result in a just and equitable outcome.
“However, as is often the case, particularly where one party has assumed the greater parenting and homemaker role, there will be a large disparity between the parties’ superannuation balances,” she says.
The roles the parties had assumed during the relationship may also result in a large earning disparity. A fair outcome may mean super be equalised between the parties or a portion of one party’s superannuation be split and rolled over to the other party.
Splitting the assets
There are a number of options when it comes to splitting the assets in an SMSF. These include:
- One member retaining the entire superannuation balance.
- Splitting the balance.
- Transferring the balance to one partner’s account.
“Any split can be arranged as a percentage of the member’s balance, or a fixed figure measured at a point in time. It can also be set to happen now, or when the member has met a condition of release,” Vaka says, adding, “the intricacies of this process are very individual and should involve an assessment of each party’s financial situation and needs into the future.”
There are two ways to formalise a split of the matrimonial pool. One involves a binding financial agreement, which requires each party to obtain independent legal advice. This is then used to request a consent order from the courts. The second is a family court order, where the court decides on a just and equitable, split before issuing a binding court order.
“Either of these is binding on the trustees of the superannuation fund. In the case of an SMSF this means that all trustees need to comply,” Vaka says.
Additionally, as trustees of the fund – either personally or via a corporate trustee – partners will need to decide how to proceed with the fund.
One option is to keep the current structure and arrangements. Another approach is for one trustee to depart the fund. The remaining partner then needs to restructure the SMSF to comply with the trustee requirements. Alternatively, both members can leave the fund and wind it up.
What happens when members are in retirement
There’s a great deal more flexibility if the members can access their super. For instance, super benefits can be immediately split.
“Accessing your super via a pension can also provide tax benefits if the fund has to sell down assets at a capital gain, owing to the generous tax status of account-based pensions,” Vaka says.
“But this is a complex area, as moving funds in or out of super can have severe consequences for all involved,” he adds.
What happens if you can’t access your super
If you can’t access your super, then your balance will either be flagged so that the split is processed when you do meet a condition of release or the split will be processed to your spouse’s account.
“This can be complicated for SMSFs, because one of the members may choose to depart the fund once the split has been agreed. This will likely trigger the redemption or liquidation of some assets in the fund,” Vaka explains.
The tax implications will depend on the members’ age and working status.
“In the accumulation phase, capital gains tax (CGT) may apply if the assets need to be sold to fund a payment out of the fund or if there’s a full wind up,” says Pete Pennicott, a director of financial advice firm Pekada. The amount will be 15% of the gain with a 33.33% discount applied for assets held for more than 12 months, bringing it down to 10%.
“This will impact both members’ benefits as the fund will need to factor in the tax prior to paying benefits out of the SMSF,” he adds.
Members can benefit from the CGT exemption that is available for assets in retirement phase.
Says Pennicott: “Timing is key here and as a result members should be sure to explore options for timing the sale of assets before doing any transactions.”
In particular if the members of the fund are close to preservation age then there may be significant tax advantage on agreeing to delay the sale of any SMSF assets until the members are able to move the funds into retirement phase to access the CGT exemption.
Another tricky situation to navigate is the existing relationships with financial advisers and accountants. In many cases it may not be feasible both spouses to remain as clients of the same advisers. Decisions will need to be made as to who retains the relationship and if a new, neutral adviser is required for ongoing advice and services that are joint in nature.
“Divorce proceedings can drag on and stretch across multiple financial years. But ongoing administration still needs to be done, so making a decision as to who the fund will engage cannot be deferred until settlement,” says Pennicott.
There are many factors that need to be carefully considered by SMSF trustees during a divorce. All parties must ensure they follow the letter of the law or there can be serious consequences that can ultimately affect the wealth of both parties at a very difficult time. Obtaining clear, impartial advice is key.