Divorce or relationship breakdowns have a significant impact on superannuation benefits as a result of the potential changes to individual member accounts. As the underlying circumstances of each relationship and corresponding superannuation benefits are unique, it really is a case by case scenario as to what the final outcome will be. Don’t start stressing just yet as it doesn’t always have to be complicated, and just because someone you know is still wearing some battle scars from their SMSF breakup isn’t indicative of what you will experience. From experience, the outcomes and time taken to reach these vary greatly. Key influences are how amicable the parties are, and how clear their documentation is in detailing what happens for a relationship breakdown.

So why is super such a key battleground when navigating a relationship breakdown?

Simply it is the economics. Super is one of the largest assets outside of the family home, so it makes sense that there is a significant focus placed on how the benefits are treated and divided as part of a divorce settlement. The Family Law Act 1975 details that superannuation interests form part of the definition of ‘property’ and can be divided in the event of a marriage breakdown (this also applies to de facto couples separating after 1 March 2009). The ramifications are that part of a members benefit which is currently invested in line with the fund’s investment strategy may be required to be transferred out of the fund to an ex-spouse.

The impact of divorce on an SMSF is significant and in extreme cases may result in the most appropriate action being to wind up the fund. Most commonly it is merely a matter of an ex-spouse leaving a fund or a splitting order requiring part of the remaining member’s balance to leave the fund. While simple even the rolling out of one member’s benefit can reduce the total size of the fund to a point where the economies of scale are no longer viable for an SMSF. Also, to free up the necessary cash to pay out the benefit assets may need to be sold. This adds complexity due to timing and potential tax consequences.

What are the key tension points?

We also see points of tension arise regularly where unlisted assets are involved which are to remain in the fund and there is disagreement on the valuation. Ultimately this is not an exhaustive list, but it does highlight the additional expenses and risks involved with SMSFs in a relationship breakdown.

Another tricky situation to navigate is the existing relationships with professional advisers such as financial advisers and accountants. In many cases, it may not be feasible both spouses to remain as clients of the current advisers and decisions will need to be made as to who retains the relationship. An alternative may be that a new neutral adviser is required for ongoing advice and services which are joint in nature. Unfortunately, divorce proceedings in some cases can drag on for several months and as a result, stretch across multiple financial years. The ongoing administration of the fund still needs to be completed, so making a decision as to who the fund will be engaging to complete this is something that cannot be deferred until a settlement is reached.

What are the options?

Ideally, the members of the fund would have a binding financial agreement which incorporates a superannuation agreement. This sets out the terms of how the superannuation benefits will be dealt with in the event of a relationship breakdown. By having this in place, it saves time, costs and frustration of having to come to terms after the fact when emotions may be running high.

If there is no superannuation agreement in place, then court orders will be required to split the super benefits. These court orders can take two forms:
Consent orders where a separating couple does not have a binding financial agreement but have reached an agreement on how their property should be divided.

Financial orders are required where a separating couple cannot reach an agreement on how their property should be split. The court then makes a decision and can issue a financial order to divide the couple’s assets based on what they deem appropriate given the individual circumstances.

Once one of the above outcomes are reached, then there may be a splitting order applied to superannuation benefits. It is important to note that superannuation rules, including preservation, still apply.

It is always advisable that Trustees seek legal advice from the lawyers who are assisting them with the settlement to see what the requirements are.

What happens if you can access your super?

There is a silver lining if you have access to your super benefits as a result of satisfying a condition of release or the benefit contains an unrestricted non-preserved component. You have more optionality for the funds. The advantage here is that you may have the option to receive the funds personally and not be limited to transferring the benefit within the superannuation system.

What happens if you can’t access you’re super?

Your benefit will need to be retained in the fund or rolled into another complying superannuation fund. A splitting order doesn’t change the preservation rules or components of your superannuation benefit, and if you are under preservation age, then the funds will need to remain in the superannuation system albeit with a new provider.

Tax implications if it’s shut down?

Depending on your age and working status, this can differ greatly. In accumulation phase, if assets are required to be sold to fund a payment out of the fund or a full wind up, then capital gains tax may apply. 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 before paying benefits out of the SMSF.

You can benefit from the CGT exemption that is available for assets in retirement phase. Timing is key here, and as a result, members should be sure to explore options for timing the sale of assets before making any transaction. 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 can move the funds into retirement phase to access the CGT exemption.

What actions should you take?

If you are going through a relationship breakdown and have a self managed superannuation fund, then you should seek independent advice as soon as reasonably possible to best understand your options and what actions are required. If you have any queries about the points discussed above, then please feel free to reach out to me for a chat at pete@pekada.com.au.