Divorce can be a challenging and emotional process, especially when it involves dividing complex assets such as a Self-Managed Superannuation Fund (SMSF).
An SMSF is a special type of superannuation fund that allows you to manage your retirement savings personally, but when a marriage ends, determining how to split the fund becomes crucial.
In Australia, superannuation is treated as property, and this includes SMSFs, meaning they must be included in any divorce settlement.
To answer your questions about SMSF divorce, let’s explore this topic further, explaining how the fund is divided, the tax implications, who can retain control, how the value is determined, and steps to protect your SMSF during the divorce process.
I. How Are SMSFs Divided During Divorce in Australia?
In Australia, superannuation is considered part of the marital assets, which means it needs to be included in the property settlement when a couple divorces. This rule applies whether the superannuation is held in a large fund managed by a professional institution or in an SMSF.
\When dividing an SMSF, both parties need to consider the complexities of splitting superannuation, particularly when they both have been trustees or members of the fund.
Under the Family Law Act 1975, there are two primary ways to divide an SMSF in a divorce:
Through mutual agreement: If both parties agree, they can decide how the SMSF will be divided through a Binding Financial Agreement (BFA) or Consent Orders. These documents outline the terms of the settlement and must be approved by the Family Court.
Through a Court decision: If no agreement can be reached, the Court will issue a superannuation splitting order. This order will instruct how the superannuation, including the SMSF, is to be split between the two parties.
An SMSF can either be divided by transferring part of the balance to the other party’s superannuation fund or by creating a new SMSF if both parties wish to retain control over their superannuation.
Also Read: Binding Financial Agreement Advantages And Disadvantages
II. What Are the Tax Implications of Splitting an SMSF in a Divorce?
Splitting an SMSF during a divorce generally does not result in immediate tax liabilities, but it’s essential to understand the tax implications to avoid unexpected costs down the track.
In most cases, the transfer of superannuation benefits from one SMSF to another or to a separate superannuation fund is tax-free, thanks to rollover provisions in Australian law. This means the superannuation benefits are transferred without incurring any tax at the time of the transfer.
However, the tax implications can vary depending on the status of the parties involved:
Accumulation Phase: If both individuals are still in the accumulation phase, meaning they are still contributing to their superannuation, the rollover is typically free from taxes.
Pension Phase: If one or both parties are in the pension phase and have started drawing on their superannuation, there are additional considerations. Superannuation balances in the pension phase may be subject to transfer balance cap limits, and exceeding these caps could result in additional tax.
Moreover, if any assets within the SMSF are sold to meet the requirements of the split, capital gains tax (CGT) may apply. Fortunately, CGT concessions exist for transfers ordered by the Family Court, but each case is different, and it’s wise to seek expert tax advice to understand how these rules apply to your situation.
Also Read: Capital Gains Tax on Property in Australia: Quick Guide
III. Can One Party Retain Control of the SMSF After a Divorce?
Yes, it is possible for one party to retain control of the SMSF after a divorce, but this requires some important changes to the structure of the fund. By law, an SMSF must have at least two trustees or a corporate trustee.
If the couple were both trustees of the SMSF, one person cannot simply continue managing the fund without making adjustments.
To retain control of the SMSF, the remaining spouse will need to:
Appoint Another Trustee: If the SMSF continues with individual trustees, another person must be added to replace the departing spouse.
Convert to a Corporate Trustee: Many SMSF holders opt to convert the fund to a corporate trustee model. In this case, the remaining spouse becomes the sole director of the corporate trustee, which allows for single control while still complying with superannuation law.
It’s important to note that retaining an SMSF after divorce involves taking on full responsibility for managing the fund, ensuring compliance with the Australian Taxation Office (ATO) regulations, and fulfilling legal obligations.
Professional advice from an SMSF specialist is strongly recommended to ensure that all legal requirements are met.
IV. How Is the Value of an SMSF Determined During a Property Settlement?
Valuing an SMSF during a divorce is an essential part of the property settlement process. The value of the SMSF is based on the total value of the fund’s assets minus any liabilities, which must be accurately assessed for the purpose of dividing the fund fairly.
Here’s how the value is determined:
Asset Valuation: All the assets within the SMSF, such as property, shares, or cash, must be valued at their current market value. For some assets, particularly real estate, a licensed valuer may need to be engaged to determine the true market value.
Liabilities: Any outstanding debts or liabilities within the SMSF must be deducted from the total asset value.
Contributions and Entitlements: The contributions each party has made over time will also be considered, as well as any specific entitlements they may have under the SMSF trust deed.
An independent expert, such as a financial adviser or SMSF specialist, may be engaged to assess the true value of the SMSF during the settlement process.
V. What Steps Should I Take to Protect My SMSF in a Divorce?
Going through a divorce can be overwhelming, but there are steps you can take to protect your SMSF. Acting early and seeking professional advice is essential to ensure your superannuation is protected during the settlement process.
Here are some key steps:
Get Expert Legal Advice: Speak with a family lawyer who specialises in SMSF matters to understand your rights and obligations.
Engage a Financial Adviser: SMSFs are complex financial structures, and getting advice from a financial adviser who specialises in SMSFs can help ensure you are making informed decisions.
Keep Detailed Records: Ensure you have up-to-date records of all contributions, assets, and transactions related to your SMSF. This will help you during the property settlement negotiations.
Review Your SMSF Trust Deed: Depending on the outcome of the divorce, you may need to update the SMSF trust deed, especially if one party will no longer be involved in the fund.
By taking these steps, you can protect your SMSF and ensure a fair division of assets during your divorce.
Preparing for the Road Ahead? Get in Touch with Justice Family Lawyers
Divorce is never simple, but dividing an SMSF adds a layer of complexity that requires professional advice. Whether you’re determining the value of the fund, addressing tax implications, or deciding who will retain control, the steps involved in splitting an SMSF can be managed effectively with the right guidance.
At Justice Family Lawyers, we specialise in helping individuals manage the legal and financial complexities of divorce, including SMSFs. If you’re unsure of the best path forward, contact our property settlement lawyers today for expert advice tailored to your situation. Call now for a confidential consultation.
