By Graeme Colley
When a relationship ends, splitting and rebuilding your super can be difficult, especially if it happens later in life. Here are the things to be aware of, including those that will make the division of super as pain free as possible.
In the event of a relationship breakdown the treatment of super is governed by family law, which generally applies to married, formerly married and de-facto couples.
You are entitled to request information about your spouse’s super, provided the request is for purposes of a separation. It needs to be made in writing to the fund trustees – and you will need to sign a declaration confirming your interest in the superannuation benefit and that you have a right to obtain the information.
In fairness, these requests can be tough, particularly in the face of a bitter divorce, where one party wants to conceal information, and where one person is much more active than the other in managing the finances.
The law enables superannuation belonging to you and your spouse to be divided, although the proceeds are still subject to the normal superannuation rules such as preservation.
There are three formal methods enabling super to be split, all of which require the involvement of lawyers:
You also have options in terms of the actual division of superannuation money.
You could take super into account but agree to leave it untouched, with each member holding on to their own benefit.
Or you could flag the benefit, which is a freeze on the benefit at a certain point in time, to be paid at a later date. This is commonly used for defined benefit pensions which are not common in SMSFs.
Otherwise, you could arrange for a superannuation split. This can be done via a ‘payment split’, where the split occurs once a member has full access to their super, typically when they retire. Or there’s an ‘interest split’, where the benefit is split without delay.
It may be wise to implement a process requiring joint sign-off on fund decisions and payments. This could be done as part of an agreement/order. And it’s probably not a bad thing to implement in any event, relationship breakdown or not.
Where you decide to strike a settlement agreement, it should cover superannuation and how it is to be treated. The agreement should be drafted with the assistance of an experienced family lawyer who’s proficient with SMSFs.
It may be the case that a member has multiple accounts within an SMSF, such as an accumulation account and one or more pension accounts. The agreement should take into consideration the taxable and tax-free components of each account as it may have future tax implications.
The agreement should also cover off the fund investments. For example, a couple may seek to split the fund on a 50/50 basis, yet the fund may own a property. Here, an agreement should consider the property in practical terms, for example, will it be sold or will there be a joint ownership arrangement?
Some agreements/orders may call for the establishment of a new SMSF for one or both spouses, and for assets to be divided and transferred between funds.
This will require a decision being made on which assets will be transferred between funds, in line with each person’s member balance (and/or agreed entitlement).
One thing to be mindful of is timing: if you act too early and establish a new SMSF prior to any agreement/order, the sale or transfer of assets between funds may involve a capital gains tax event. However, if a new fund is established as part of the agreement/order, then there is no capital gains tax event.
In addition, the assets transferred to the new fund must be able to satisfy the SIS investment standards. These place a cap on in-house assets that a fund can hold: no more than 5% of the fund’s total holdings.
If one trustee is resigning from the SMSF, the fund’s trust deed should be taken into account. In some trust deeds the consent of all members is required in respect of a resignation. This of course may be difficult in an acrimonious environment.
Once the trustee resigns, the trustee structure should be reviewed. It may be that the current structure continues together with the appointment of another trustee (or director). Or it may be appropriate to change the structure from individual trustee to corporate trustee, or vice versa depending on the circumstances.
A review should be made of each member’s binding death benefit nomination (or nominated reversionary beneficiary) to ensure they are consistent with the relevant member’s wishes subsequent to the family law split.
On transfer of the relevant assets between SMSFs, the appropriate rollover benefits statement(s) should be completed so that the correct components of the departing member’s benefit are identified.
Usually, any agreement/order would need to be implemented promptly, otherwise penalties can apply.
The splitting of superannuation and family assets as part of a family law settlement is never easy, even if the separation is amicable. What must be remembered is that the legislation is designed to draw a line in the sand, provide for an equitable split of assets and let both parties get on in life with a fresh start.