Splitting SMSFs

Splitting Self Managed Superannuation Funds

Splitting assets held in a self-managed superannuation fund (SMSF) following the breakdown of a marriage or relationship and subsequent split of assets can be complex.

This article briefly summarises some key factors to consider when splitting a SMSF.

What is a Self-Managed Superannuation Fund (SMSF)?

A SMSF is a private superannuation trust fund that you manage and oversee including choosing investments and ensuring that the fund complies with superannuation and tax laws. A SMSF is established under a trust structure and its sole purpose is to provide its members with retirement benefits.

SMSFs commonly have diversified assets classes including shares, investment income, real property, and cash, to avoid the fund being exposed to the vagaries of a single asset class.

Considerations for splitting SMSFs

When considering a SMSF split in a family law separation, essential matters to keep in mind include:

1.       Documents

Copies of the following documents will help you to better understand the SMSF:

  1. the most recent up to date Trust Deed.
    1. A Register of Complying Superannuation Funds (RoCS) Search (via the Australian Tax Office [ATO] website) – to ascertain whether the SMSF is registered as a complying fund.
    1. The three most recent years financial statements, to:
      1. augment your understanding of the nature of the SMSF’s assets and its financial position; and
      1. show whether the SMSG has been audited and any areas of concern as to compliance.
    1. Member Statements.

2.       Valuation

It is vital to determine the value of the superannuation interests. Most SMSFs will have investments such as real property, cash or listed shares which are relatively straightforward to value. However, some SMSFs have assets such as collectables, antiques or units, valuation of which is more difficult.

A SMSF’s financial statements often document the values of its assets. However, the financial accounts are not always up to date, and their values are not always reliable. Reasons for this include:

  1. The financial statements are usually prepared annually, and the values ascribed to the assets as at that date may be out of date;
  2. Interest on dividends could have accumulated and taxation and other expenses could have been incurred since the financial statements were prepared;
  3. The financial accounts may contain reserves, where some of the SMSF’s assets have not yet been allocated to its members;
  4. There may be a dispute about the value of assets. For example, real estate values may not be market values. In that case, an expert valuer should value the real estate.

3.       Tax Implications

There may be tax implications dependent on the nature of the assets to be split.

Non-complying funds potentially have tax liabilities and ATO penalties.

An asset may have latent Capital Gain Tax (CGT). For example, if the SMSF is forced to sell investments (i.e. shares or real property) to implement a cash transfer, then the SMSF will be subjected to CGT on any capital gains made. In certain situations, CGT rollover reliefs provisions may be available to reduce or eliminate CGT where assets are transferred between SMSFs in specie (meaning a transfer of assets in its actual form without selling the underlying asset).

Specialised tax advice will assist you to devise a strategy based on the taxation consequences of rolling out your interest into another SMSF or an industry regulated fund.

4.       Membership and restructure of the SMSF

As a member of an SMSF, you are also a trustee with ongoing responsibilities. You must decide if you wish to remain in the SMSF, commence a new SMSF or open a different type of fund such as an accumulated regulated fund. The decision as to what is appropriate will vary from case to case.

Splitting a SMSF will typically require the fund to be restructured to comply with superannuation regulations and laws. Examples of restructures include:

  1. a person cannot be a single trustee and member, so a corporate trustee may have to be established in place of members being trustees; or
    1. a member spouse may resign as a director of a corporate trustee.

Types of Spitting Orders

A SMSF interest may be split in a financial agreement or by a court order.

There are generally two methods that a SMSF interest can be split – as a specific dollar amount (base amount) or as a percentage of the balance of the superannuation entitlements.  A base amount payment is the most common method used, as it guarantees the amount that a non-member spouse will receive from the split, while a percentage split may be higher or lower than the estimated value of the interest, depending on the interest’s value when the fund’s Trustee gives effect to the Court Order. The circumstances of your matter and the current economic circumstances dictate which type of split is appropriate.

Once the superannuation interest becomes subject to a payment split, the non-member spouse generally has one of the following options in respect of the interest:

  1. create a new interest in the same fund –– this option however may be precluded under the SMSF Trust Deed and is not recommended if the separation is acrimonious;
  2. transfer or rollover the interests into another complying fund (including a new SMSF or an industry regulated superannuation fund). If the non- member spouse does not wish to set up another SMSF and there is insufficient cash to be rolled over into an accumulation fund, SMSF assets may have to be sold; or
  3. if the non-member spouse has met conditions of release under superannuation laws – receive the amount as a lump-sum payment.

Once the non-member spouse has selected how the superannuation interest should be split, the SMSF trustee must generally give effect to that choice.

Superannuation splitting rules are complex, often requiring the advice of accountants, financial advisers and family lawyers working collaboratively to determine an optimal approach towards splitting superannuation.

Contact us today for expert advice on your SMSF and family law property settlement.

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Buying a Business – Due Diligence

What is Due Diligence?

Due diligence is the process where a buyer of a business reviews and verifies the information the seller supplies about the business, usually before entering into a business sales contract. This could include examining the business’ records and inspecting its physical assets. Due diligence can uncover problems that can be costly or cause the business to fail. Examples include that equipment is not owned by the seller, and that important agreements cannot be transferred.. The due diligence process should include investigating:

  • who owns important assets (i.e. trade marks, software, licences);
  • the business’ ability to make a profit;
  • the condition of the equipment (i.e. computers, ovens, vehicles); and
  • whether there are any nearby businesses you will have to compete with.

This article provides an overview of the due diligence process required, and how to complete it.

Starting due diligence

When buying a business, you could undertake the due diligence work yourself. For more complex businesses, it is worth considering having a due diligence team with expertise in areas such as law and accounting to assist you. Your due diligence team should include professionals who can support you in assessing the commercial, financial and legal risks associated with your business purchase, including:

  • a lawyer;
  • an accountant or financial advisor; and
  • your business advisor or broker.

A due diligence team will assist you by:

  • reviewing the business’ records;
  • giving you professional advice on the business’ viability and suitability; and
  • making you aware of any existing risks and liabilities.

The due diligence timeframe

Due diligence usually takes place before entering into the sale contract. Alternatively, a due diligence period can be included in the sale contract. The contract includes a clause that allows you to terminate the agreement if your due diligence uncovers something that could make it difficult for the business to succeed.

The due diligence process

1. Request documentation to review

You, or a member of your due diligence team (such as your lawyer or accountant), sends the seller a list of the types of business records you would like to inspect (e.g. product sale history, financial statements, equipment hire contracts, etc.). You can also ask the seller for permission to physically inspect key equipment and the premises.

2. Documentation is provided

The seller can provide you with that information in person, via email, or through a member of their own due diligence team (e.g. their lawyer). Or they can upload the information to a secure document sharing platform (like Dropbox or Google Drive) for you to access and download. This type of platform (often called a data room) can be accessed by the seller’s and the buyer’s due diligence teams.

3. Requests For Information (RFI) process

You can ask for additional documents from the seller and ask them questions about the information they provided (an ‘RFI’ [Requests For Information]) via a spreadsheet or Word document.

4. RFI responses provided

The seller submits responses to your questions. During this process, your due diligence team assesses and reports on:

  • any key concerns they have about the business; and
  • potential solutions or options you can raise with the seller to reduce risks associated with the purchase.

5. Due diligence reports prepared and assessed

Your due diligence team prepares reports to assist your decision whether to purchase the business.

6. Proceeding with the Purchase

You may decide that:

  • that the business’s value is such that you are willing to pay the asking price; or
  • you want to try to negotiate a reduced price based on your due diligence reports; or
  • the business is too risky and you will not proceed with the purchase.

When should I undertake due diligence?

The due diligence review process generally takes place before you enter into a formal sale of business contract. Otherwise, you risk paying for a business with broken or damaged equipment, expired or unsuitable contracts, unexpected financial issues, or premises with health and safety issues that you will have to rectify at great expense.

However, it is also possible to have a due diligence period clause included in the contract. This allows you to sign the contract and conduct your due diligence within a period of time (e.g. 10 business days) after signing. If you uncover something about the business you are unhappy with during this period, you can terminate the contract and walk away from the sale.

How long does due diligence take?

This depends on:

  • your timing for the sale;
  • how quickly the seller provides you with the requested information;
  • how long your due diligence team needs to prepare the relevant reports and discuss them with you;
  • the business’ complexity; and
  • how many records you want to review.

Consequently, the due diligence process can take anywhere from a week or two to several months. You should be flexible in your timing for the business purchase.

Confidentiality and non-compete

If the seller refuses to give you certain documents before you sign the contract, they may be worried about what you will do with the information. For example, they may be concerned that you will disclose it to third parties without their approval or use it to compete with their business. In this situation, you should ask the seller why they have not provided the requested documents.

If they are concerned about confidentiality, offer to first sign a non-disclosure or confidentiality agreement. If the sale of business contract includes a due diligence period, the contract should include confidentiality obligations to protect the seller’s information.

If the seller continues to refuse to provide you with certain documents, take it as a red flag. There may be issues with the business or documentation they do not want you to learn about.

What do I review?

You should investigate all business records, issues and assets that will help you decide whether proceed with the purchase. This will help:

  • uncover any issues you should be concerned about;
  • you to understand how the business has been operating recently; and
  • inform your decision on how to proceed with the purchase.

Financial issues

Key Issues/DocumentsExplanation
Balance sheetsIncluding accumulated entitlements to annual leave or other employee benefits
Sales recordsTo check how the products or services of the business perform (i.e. which product line is most valuable)
Profit and loss statementThis shows how much money or profit the business is making
Tax returnsTo understand the revenue of the business and the tax required to be paid each year (on average)
The valuation of the businessThis is how much the business is worth

Commercial issues

Key Issues/DocumentsExplanation
CompetitionAre there other similar businesses competing with yours?
Growth opportunitiesIs it a declining industry?
Business suitabilityWhat experience do you have in the industry?
LocationIs it a busy area or are there any impending developments?
The condition of key assetsFor example, computers, ovens, vehicles etc.

Legal issues

Key Issues/DocumentsExplanation
The contracts in placeLeases for the premises, supply contracts etc.
EmployeesWhether they have valid contracts and are employed under the appropriate awards?
Corporate information about the sellerIf they are a company, confirming who the directors are.
Asset ownershipWho owns trade marks, software etc.
Compliance with laws and regulationsConfirm if appropriate licences are in place, such as liquor licences, food licences etc.

Legal documents

You should review some common legal documents. For example, documentation that confirms ownership of particular assets, and the seller’s contracts with third parties.

Contracts

Contracts common to most businesses that you should review during due diligence include:

  • client agreements;
  • supply contracts;
  • leases; and
  • employment contracts.

As these documents may be transferred to you if you purchase the business, it is important that their terms are agreeable to you. You should review the following clauses in these agreements.

Client Agreements

  • liability exclusions and caps (i.e. if the seller does not deliver the goods/services on time, is there a maximum amount to which the clients can make a claim?);
  • payment terms (i.e. how does the seller get paid by clients and when?); and
  • handling of personal information (i.e. is the seller handling data in compliance with the Australian privacy laws (if relevant)?). assignment clauses (i.e. can the seller transfer the contract to you without the client’s consent?).

Supply Contracts

  • liability exclusions and caps (i.e. is there a maximum amount to which the seller can make a claim against the supplier if they do not deliver goods on time?);
  • payment terms (i.e. what kind of payment arrangement does the seller have with the supplier?);
  • assignment clauses (i.e. can the seller transfer the contract to you without the supplier’s consent?); and
  • services (i.e. what kind of services are to be provided and are these suitable?).

Leases

  • rent (amount and increases);
  • outgoings, or additional expenses associated with the premises (i.e. council rates, garbage collection costs, maintenance and repair costs, etc);
  • term of the Lease (i.e. can you renew your lease for another term at the end of the initial period? How long is left on the term?);
  • maintaining the premises (including whether there is a ‘make good obligation’ to leave the premises in the same condition as when you entered the lease);
  • permitted use (i.e. does the lease allow you to operate the type of business you want to operate);
  • guarantors (i.e. a requirement to personally guarantee the tenant’s obligations, such as the obligation to pay rent and maintain the premises in good repair); and
  • other licences required to operate the business (i.e. food premises licence, liquor licence).

Employment Contracts

  • type of employment (i.e. are the employees classed as permanent or casual?);
  • award (i.e. and ensuring that they are covered by the correct award);
  • entitlements (i.e. to annual leave, long service leave, personal leave and parental leave);
  • role and responsibilities (i.e. what is their job description?);
  • key employees (i.e are there any employees who are key for the continued operation of the business? Does the sale contract contain a condition that these employees must sign a new employment agreement with you prior to the completion of the sale?); and
  • salary (i.e. how much are they being paid?).

Many businesses have, by incorrectly applying award wages, underpaid their employees. This is not a problem you want to risk inheriting, especially if you plan to hire those employees to work in the business.

Business assets

If the business has assets that you want to ensure the seller fully owns (so they can be transferred or assigned to you as part of the purchase), you should consider the following:

Key Business AssetsWhat to Consider
Intellectual PropertyTrade marks, designs and patentsAre they registered and owned by the seller? A search of IP Australia will confirm ownership.
Business namesIs there a registered business name? A search of ASIC Connect will confirm ownership.
Contact detailsDoes the seller have social media accounts, email addresses, websites that need to be transferred? Who owns these accounts?
ContentWho owns marketing material?
SoftwareWho owns the source code?
EquipmentEquipment lease or hire to purchaseIf a security interest in respect of equipment is listed on the PPSR, someone else may have a claim to that equipment if their arrangement with the seller is not fulfilled. The sale contract should state that the seller is transferring all equipment to you free of any other interests and that they own all equipment outright.
Title to equipment and physical assetsDoes the seller have documents of title or payment receipts/invoices showing their purchase of key items?

For intellectual property registrations, the sale contract can:

  • state that the seller must pay all outstanding fees; and
  • contain an indemnity for outstanding fees. This allows you to recover the cost of these fees from the seller if you must pay them to maintain the relevant registrations.

How to reduce your risk

Buying a business involves risks. Whilst performing due diligence will help you make an informed decision about the business, it will not eliminate all risks. You can reduce the potential impact of these risks by asking the seller for at least some of the following:

1. Purchase Price Reduction

If you have uncovered issues with the business which may adversely affect it’s value (e.g. if the business’ financial statements reveal that it suffered a bigger loss than you initially thought), consider asking the seller to reduce the purchase price.

2. Warranties

You can ask the seller to provide warranties for the business in the contract. Warranties are promises that the seller makes to you about certain facts relating to the business (e.g. there are no unpaid superannuation entitlements owed to any employees). If you purchase the business and then learn that this statement was untrue, then you will have a breach of contract claim against the seller and can claim compensation as a result (provided you can show that you suffered loss as a result of the seller’s breach).

3. Indemnities

These are contractual obligations that require the seller to reimburse you for a specific liability. Indemnities provide greater protection than warranties. An indemnity requires you to show that you have suffered a loss connected to the indemnity but does not require you to prove that a breach by the seller caused the loss. For example, the seller is involved in a dispute with one of their manufacturers. To protect yourself against potential loss from that dispute, you can request inclusion of an indemnity in the contract requiring the seller to reimburse you for any loss you may suffer in connection with that dispute.

Due diligence checklist

  • Assemble due diligence team;
  • Request documentation and information from the seller, including:
    • Financial documents; and
    • Business assets;
  • Request additional information as needed;
  • Prepare due diligence reports;
  • Assess information gathered and due diligence reports;
  • Decide whether to purchase the business;
  • Take steps to reduce your risk;
    • Negotiate purchase price;
    • Request warranties; and
    • Request indemnities.

How can we help?

We can assist you with the due diligence process so you are protected in your purchase of the business. If you have any questions, contact us on 0451118644 or 02 47593742.

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Selling a small business

This article outlines considerations during the stages of selling your business, from before the exchange of contracts to settlement, and any tax implications.

Selling Your Business

When selling your business, you will first need to decide if you are selling the company itself (and therefore, selling the shares in the company) or just selling the business and its assets. You will need to have the business valued by a business valuer. You must then decide on the price you are willing to sell the business for. If a buyer has not already approached you directly, you will then need to advertise the sale, either personally or through a broker.

A lawyer can only provide you with legal advice, not financial advice. If you require financial advice (e.g. how much you should value the business, whether it is the right time to sell the business), you should speak with a financial advisor.

Transfer of Ownership

If the ownership of a business is not effectively transferred to the purchasing party, this may later cause you legal difficulties. To make sure that you are transferring all ownership of the rights, responsibilities, liabilities and assets of your businesses, you must understand what these items are and that they are included in the Contract for the Sale and Purchase of Business 2021 (NSW).

Assets that you can transfer during a sale of business include:

  1. goodwill and stock-in-trade;
  2. contracts with suppliers;
  3. licenses and permits that purchaser may need to conduct the business;
  4. leasehold interests, if you are currently leasing a business premises which the purchaser may wish to use after the sale;
  5. your intellectual property rights in the business name or logo; and
  6. franchise agreements.

Before Exchanging Contracts

Usually, a standard contract for the sale of business is used for the sale of a business. This contract contains extensive clauses that cover all legal requirements under Australian law. However, as all businesses are different, you may need to add clauses or special conditions to your contract. Special conditions can be added to the end of the contract. These must be drafted properly to avoid any uncertainty or confusion. The purchaser will use this time to conduct preliminary searches, reviews and inspections of the business documents and premises to familiarise themselves with all the aspects of the purchase.

Exchange of Contracts

Following completion of all negotiations on the contract terms of the sale, you and the purchaser each sign an identical copy of the contract and exchange them. It is your responsibility to arrange for a time and place for exchange of contracts. After exchange, the contract is legally binding. The purchaser will usually give you a cheque for the deposit during exchange.

Pre Settlement

During this stage, you are required to fulfil the obligations outlined in the contract. There are standard obligations and there may be additional obligations in the special conditions that you must fulfil. Some standard obligations are:

  1. completing all documents required to transfer ownership to the purchaser;
  2. getting the landlord’s consent to transfer the lease to the purchaser;
  3. discharging securities, mortgages or any other encumbrances held over your business; and
  4. maintaining your company’s goodwill;

Settlement

At settlement, you may need to exchange certain documents. You will have to provide the purchaser with documents passing ownership rights to them. The purchaser may give you bank cheques or deeds in return. For example, in the case of a share sale, you may give the purchasers:

  1. share transfers;
  2. a director resignation document;
  3. an appointment of directors document;
  4. approvals for share transfers;
  5. share certificates; and
  6. items listed in the second schedule.

In exchange, the purchasers may give you a:

  1. bank cheque for the sale price of your business or the shares;
  2. signed deed of guarantee by the purchasers; and
  3. deed of guarantee if there is a lessor.

Post Settlement

After settlement, the purchaser has to undertake tasks to ensure that they have full ownership of the business. Your lawyer has tasks to complete to ensure the cessation of your responsibility for assets transferred to the purchaser. These may include:

  1. cancelling any licenses and insurance in your name relating to the business;
  2. handing over any stock or inventory;
  3. sending an order to the agent that the purchaser’s deposit is to be transferred to you;
  4. giving the new owner a list of passwords to accounts;
  5. ensuring you pay out staff leave entitlements for any staff the purchaser has not taken on;
  6. finding out from your lawyer the settlement proceeds, and your lawyer’s costs;
  7. transferring assets into the new owner’s name; and
  8. passing on the business client list.

Taxes – Including CGT, GST and Other Costs

A major concern when selling a business is the tax implications the transaction may attract. You should consider any taxes that may apply, which may reduce the money you end up with after the sale. If you are registered for Goods and Services Tax (GST), you may be liable to pay GST. However, if you sell your business as a going concern, the sale may not attract GST. If your business is being sold as a going concern:

  1. the purchaser is registered for GST; and
  2. you will sell the business in return for payment; and
  3. you are supplying everything to the purchaser so they can continue operating the business;
  4. you have agreed with the purchaser that the sale is of a going concern; and
  5. your intention is to carry on the business until you sell it to the purchaser.

If you sell your business and make a profit, the profit may be subject to Capital Gains Tax. This tax applies to any:

  1. intangible assets (e.g. intellectual property);
  2. business assets; and
  3. goodwill.

There are tax concessions that may be available to you as a small business owner. The sale of your business may also be subject to transfer duty, which the purchaser must pay.

Conclusion

While selling a business can be very exciting, the process can also be rather tricky. It is a good idea to get legal assistance during this time so you are aware of all your risks, obligations and duties as the seller.

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Buying a small business

If you are considering buying a small business, there is a legal process after you shake hands which may take weeks or months to finalise.

Finance is often one of the biggest impediments to a buying a business so it’s prudent to apply for your business loan as soon as possible. Once you have located a business you want to buy, you should contact a lawyer and other professionals such as financial advisors, valuers and accountants, who can help you decide if the purchase would be a good investment.

The seller usually instructs their solicitor to draft the contract for sale which is forwarded to the buyer’s solicitor. Your solicitor and/or accountant can advise you in regards to:

  • The key elements being purchased, and whether it is necessary to purchase the business. There may be taxation or other financial reasons to only purchase the equipment used in the business, or have a licence granted to operate the business, or purchase the company that operates the business, rather than purchasing the whole business. All of these options will result in you operating a business but each is accompanied by different legal implications;
  • advice on the contract for sale our business;
  • Licensing or qualification requirements for your industry;
  • The type of entity to operate your business. Eg. sole trader, incorporated company, trust.

Contract Advice and Negotiation

We closely examine the contract for sale of business drafted by the seller’s solicitor. We advise you in regards to the terms of the contract and, if necessary, negotiate amendments with the seller’s solicitor to better suit your requirements. This process involves the consideration of aspects of the purchase which may have not as yet have arisen including:

  • Ensuring that the appropriate and complete equipment is listed as inclusions in the contract and that the description in the contract matches the equipment on site;
  • Ascertaining whether any of the equipment is subject to hire purchase arrangements, a finance charge, or a mortgage to ensure clear title on settlement;
  • Any training period to be provided by the sellers;
  • Treatment of any debt/creditors, unbilled fees, and work in progress up to the point of sale;
  • Whether a lease is to be assigned to you;
  • Whether you are re-employing existing employees; and
  • Whether registered intellectual property is to be transferred to you.

Between exchange and completion

Upon agreement being reached on the terms of the contract, it is signed and contracts are exchanged by the solicitors, making the agreement legally binding.

The agreement will specify the role of the parties between exchange and settlement (when you pay the balance of the purchase price). During this post exchange – pre settlement period you must attend to some or all of the following:

  • Finalise loan documentation (if the contract is not subject to finance loan documentation it must be finalised prior to the exchange of contracts);
  • Enter into employment contracts;
  • Obtain Public Liability Insurance, Worker’s Compensation and any other necessary insurance (such as plate glass);
  • Obtain bank guarantees in compliance with the terms of the lease (if any);
  • Obtain any required licenses or approvals;
  • Notify suppliers/clients of new ownership, ABN, and bank details.

The next step

We are experienced in acting for purchasers of businesses. If you are thinking about, or have already struck a deal to buy a business, contact us to support and guide you through the process.

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Family Law Super Splitting

What are the superannuation splitting laws?

The superannuation splitting laws allow separating de facto or married couples to value and divide their superannuation after a relationship break down. One partner may split the amount remaining in their superannuation fund and make a payment to the other partner’s superannuation fund.

The Family Law Act treats superannuation as if it were property, although it differs from other types of property as it is held in trust. Splitting superannuation does not convert it into a cash asset: the super funds are still subject to superannuation laws and the usual conditions of release.

Am I entitled to a superannuation split? Do I have to pay super to my ex-partner?

You may be entitled to a superannuation split, or legally obligated to split your superannuation if you were married or in a de facto relationship and have separated. The Family Law Act defines a de facto relationship as two people not married to each other, not related by family, and sharing a relationship as a “couple living together on a genuine domestic basis”. A person seeking superannuation splitting orders must have been in a de facto relationship with the other person for at least 2 years unless:

  • there is at least one child of the relationship; or
  • a party makes a substantial contribution

In that case an application can be made seeking superannuation orders even if the relationship broke down before two years.

How much of my ex-partner’s superannuation am I entitled to/might I have to pay?

In a long relationship, where neither party had substantial superannuation at the beginning of the relationship, a superannuation split will often be calculated which equalises their superannuation interests. The parties add the value of all their superannuation interests, divide the total by two and split one party’s superannuation to the other party’s fund of choice to equalise their superannuation interests.

Alternatively, parties may negotiate a superannuation split tailored to their needs which forms part of an overall package of property settlement. For example, one party may wish to retain a greater share of the cash assets to purchase a property, while the other may be approaching retirement and prefer to retain their super. The party wanting more cash assets may concede their superannuation entitlements to negotiate a greater share of the cash assets.

The Courts have a wide discretion to determine a just and equitable division of the parties’ superannuation interests. If a Court determined the matter, a four-step process would be applied to determine each parties’ entitlement:

  1. the superannuation must be valued; then
  2. each parties’ financial and non-financial contributions to the acquisition, conservation and improvement of the superannuation fund must be assessed; then
  3. the Court will consider factors under s 75(2) or 90SF(3) of the Family Law Act, including:
    1. each party’s age and state of health;
    1. each party’s income earning capacity;
    1. if there are children of the relationship, with whom they live; and
    1. each party’s existing financial commitments and responsibilities.
  4. The Court determines whether in all the circumstances the settlement is just and equitable.

What if we cannot agree about how to divide superannuation?

If you and your ex-partner cannot reach agreement about how to divide your superannuation interests, you can apply to the Court for an order. The Court will apply the four step process to determine a just and equitable division of superannuation.

How long after a separation or divorce can I make a claim for superannuation?

If you were married:

  • If you have separated but not divorced, you can make a claim for superannuation at any time;
  • If you have divorced, you should make a Court application for superannuation orders within 12 months after the divorce.

If you were in a de facto relationship, you should make a Court application for superannuation orders within 2 years after you separated.

The Court may grant leave for a party to a marriage or de facto relationship to apply for a superannuation order after the limitation period if they can establish hardship. However, this can be a very expensive and complicated process, as a special application must be made to the Court seeking leave to proceed out of time and there is no guarantee that leave will be granted.

How can I obtain information about the value of my or my partner’s superannuation fund?

You can apply to the trustee of the superannuation fund for information about a superannuation interest of a member if you:

  • are an ‘eligible person’; and
  • have a genuine reason for needing the information.

An ‘eligible person’ includes:

  • the member;
  • the member’s spouse;
  • if the member or spouse is deceased, their legal representative; or
  • a person intending to enter into a superannuation agreement with the member.

To apply for information about the member’s superannuation interest, the eligible person will have to declare that they require the information in order to either

a) properly negotiate a superannuation agreement, or

b) assist them in connection with family law proceedings relating to the superannuation interest.

The applicant will also have to provide the member’s full name and date of birth.

What if my ex-partner has a defined benefit super fund or a self-managed fund?

Defined benefit funds provide benefits to members in accordance with a formula set out in the fund’s trust deed. The formula accounts for the member’s length of employment and their salary level at retirement. These funds are difficult to precisely value, and a forensic accountant may need to be engaged to value the superannuation interest.

Self-managed super funds are private funds arranged and managed by the parties themselves (often by a lawyer and/or accountant). The parties invest the fund monies by purchasing property, shares, bonds etc. to increase the value of the fund. The value of a self-managed super fund is the total value of the assets held by the fund.

How can my ex-partner and I formalise the agreement we reached to split our superannuation interests?

An agreement regarding the division of their superannuation interests can be formalised by parties entering into a Financial Agreement or applying to the Court for Consent Orders.

Alternatively, you can file an Application for Consent Orders with proposed Consent Orders in the Federal Circuit and Family Court of Australia. Once approved by a Registrar of the Court, the Orders become legally binding and enforceable on both parties and on the superannuation fund trustee.

Alternatively, parties can record their agreement in a Binding Financial Agreement (an Agreement). An Agreement is not filed with the Court. However, each party must be provided with independent legal advice before entering into an Agreement for it to be binding and enforceable. The advice must address the effect of the agreement on the rights of the parties and it’s advantages and disadvantages when the advice was provided.

What is the process for splitting superannuation?

Before finalising an Agreement or filing Consent Orders you must provide the trustee of the superannuation fund with ‘procedural fairness’ by writing to them advising that you are seeking superannuation splitting orders. You should provide the trustee with:

  • the member’s number and date of birth; and
  • the specific orders sought.

The trustee has 28 days to object to the proposed orders by writing back to you or attending the court hearing (if any). The letter from the trustee agreeing to the proposed orders is filed with an application for consent orders.

A party (generally the person who financially benefits from the split) provides the superannuation orders made by the Court to the trustee of the superannuation fund to implement.

What do I do now?

Mid Mountains Legal have extensive experience in a wide range of superannuation matters, including complex matters involving self-managed and defined benefit funds. Ask us for advice about your options and entitlements to empower you to make informed decisions.

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What is a Caveatable Interest?

What is a caveatable interest?

It is important to determine whether you have a caveatable interest in land before you lodge a caveat.

The NSW Real Property Act provides that a person may lodge a caveat with the Registrar-General if they are entitled to a legal or equitable interest in land. A caveat notifies others that you have a proprietary interest in the property and prevents them from dealing with the property without your knowledge or consent. The Registrar-General will not register any dealings (other than some statutory exceptions) that are inconsistent with your caveatable interest.

How do I determine if I have a caveatable interest?

Caveatable interests include:

  • a buyer’s interest under an agreement for sale;
  • a seller’s lien; and
  • a buyer’s lien.

Examples of non-caveatable interests are:

  • possession of a building site by a contractor;
  • the interest of a person who has improved someone else’s land; and
  • rights arising from an agreement to share profits on the resale of land.

Only those with an express interest in the property (such as a chargee or mortgagee) can claim a caveat. An express interest is where the parties agree to the lodgement of a caveat over the property.

A court judgment against another person does not create a caveatable interest in that person’s property. If you have obtained a judgment against someone, you may be able to negotiate and agree to create a caveatable interest in their property. You can then lodge a caveat to protect your interest.

How do I lodge a caveat?

In NSW, a subscriber to an Electronic Lodgement Network Operator (such as a solicitor or conveyancer) completes the online form provided by NSW Land Registry Services including the following information:

  • The details of the property that you claim to have an interest in and the registered proprietor of the property. You should check this information by conducting a title search.
  • The caveator’s name and address, including the address where notices relating to the caveat may be served. This is required for service of court documents.
  • The nature of the interest you claim and how it arose (e.g. is it a legal or an equitable interest).

What should I consider if I want to include a provision in an agreement charging someone’s land?

Someone owing you money is not in itself sufficient to give you a caveatable interest. If you provide goods and services, and wish to create a caveatable interest and charge the customer’s real estate, you should consider the following:

  • The agreement should contain a clause obliging the customer to grant and register a caveat over the property.
  • Is there an agreed mechanism for withdrawal of the caveat?
  • your agreement should take into account that each State has different requirements for lodging caveats.

A caveat does not arise by specifying the folio identifier and street address in the agreement. A caveat must be lodged in a particular form and manner, satisfying any formal rules.

The agreement should specify who is responsible for drafting and lodging the caveat and who pays the lodgement fee.

How do I remove a caveat?

A caveat can be removed in several ways, most commonly when the property owner issues a lapsing notice which is served on the caveator. The caveator has 21 days from the date of service of the lapsing notice to seek an order from the Supreme Court of NSW for an order extending the operation of the caveat.

What if the caveat has not been lodged properly?

If you lodge a caveat without having a caveatable interest or a reasonable cause, you may be liable to compensate any person who suffers a resulting pecuniary loss (e.g. if you take steps to lodge a caveat over a property without having a caveatable interest, which stops the settlement or sale of the property, you may be liable to pay damages to the injured proprietor for any loss suffered. Also, you will most likely be liable for their legal costs [in addition to your own]).

 

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Removing or extending a caveat in NSW

What is a Caveat?

A caveat is a formal registration of a legal or equitable interest in land. If you are the owner of land in NSW and someone has lodged a caveat on your land, the Registrar-General will send you written notice. Lodging a caveat can prevent further dealings with the property until it’s removed. Following are ways to remove a caveat in New South Wales.

How do you remove or withdraw a caveat in NSW?
1.    Formal Withdrawal

The person lodging the caveat (the caveator) can withdraw it by instructing a solicitor or conveyancer who subscribes to an Electronic Lodgement Network Operator (ELNO) (such as PEXA) to lodge a Withdrawal of Caveat form electronically with NSW Land Registry Services [NSWLRS] (the fee is $147.70 as at October 2021).

Who else can apply to withdraw a caveat?
  • if joint tenants hold a caveat and one caveator dies, the surviving caveator;
  • the executor, administrator or trustee of a deceased caveator;
  • the Australian Securities and Investment Commission (ASIC); and
  • a trustee when the caveator is an infant or is deemed mentally incapable.

This process is only suitable for a caveator who wishes to withdraw the caveat. Where the registered owner, or another party with a relevant interest, wishes to remove the caveat, then the other methods set out below should be used.

2.    Lapsing

You may also remove a caveat if it lapses. This can occur when:

  • the caveator’s interest is satisfied because another party registers another dealing (e.g. if a caveator is an unregistered mortgagee and the mortgage is discharged);
  • the registered owner or a party with registered interest lodges an Application for Preparation of Lapsing Notice; or
  • a party lodges a dealing that the caveat prevents together with an Withdrawal of Caveat.

If the caveator refuses to withdraw formally, the property owner or another interested party may lodge (electronically via an ELNO) an Application for Preparation of Lapsing Notice to remove the caveat. The property owner may register another dealing on the land, which the caveat prevents, and apply for the lapsing of the caveat. The caveat will lapse and expire 21 days after the Notice has been lodged.

3.    Court Orders:
a.    Extending a Caveat

A caveator can apply to the Supreme Court of NSW seeking an order to extend the caveat. They must make the order and lodge it with the Registrar within 21 days from receiving the lapsing notice. A court will only honour a caveator’s order if the claim has ‘substance’. The onus of proof is on the caveator, and the court will decide whether the balance of convenience favours retaining the caveat.

Where a caveator is served with a lapsing notice and does not want their interest removed, they can give their written consent to extend the caveat. Such consent must include:

  • the full name of the caveator and registered number of caveat;
  • type of dealing consented; and
  • caveator’s signature (or their solicitor).

The consent must be absolute without any conditions. Removing a caveat by lapsing is most appropriate where it is unlikely the caveator will fight back or commence proceedings, and will instead either consent or allow the caveat to lapse willingly. Alternatively, lapsing is the best option where you cannot locate the caveator or they no longer exist (e.g. deregistered company).

b.    Withdrawing a Caveat

A party can apply to the Supreme Court for an order that a caveat be withdrawn. The party must lodge the application with the court together with a request form. This option is suitable if the need to remove the caveat is urgent, or where a party expects opposition from the caveator. The caveator bears the burden to establish a caveatable interest and reasonable cause (i.e. an interest in the land). (see Real Property Act Part 7A)

Summary

Deciding which process to use to remove a caveat depends on the circumstances. If:

  • the caveator no longer has an interest or wishes to withdraw, they can do so by a formal withdrawal;
  • you wish to remove the caveat and consider a dispute unlikely, you should file an Application for Preparation of Lapsing Notice;
  • the need to remove the caveat is urgent, or you anticipate a dispute, an application to the Supreme Court may be the best option.
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What is a Caveat?

A caveat is a type of statutory injunction preventing the registration of particular dealings with real property (i.e. real estate). It is a formal public notice or warning advising that there is an interest on the property for a particular reason.

The word caveat means ‘beware’ and lodging a caveat warns anyone dealing with the property that someone claims a priority interest in that property. The person lodging a caveat is a caveator.

Reasons for Lodging a Caveat

If you have a genuine interest in land (such as a registered mortgage), you may lodge a caveat to prevent registration of another dealing and protect your legal position. This is known as a caveatable interest.

Caveatable interests include:

  • a registered or equitable mortgage
  • a transfer
  • a purchaser under an agreement for sale
  • a tenant (in certain circumstances);
  • a registered proprietor and
  • contractual rights.

In NSW, the Real Property Act 1900 governs caveats. When a caveat is lodged at NSW Land Registry Services (NSWLRS), it prevents the registration of further dealings on the property’s title until the caveat:

  • is formally withdrawn by the caveator;
  • lapses;
  • is removed by a court order; or
  • the caveator consents to a registration by another party dealing with the property’s title.

Anyone with an interest in land or who wishes to claim an interest may lodge a caveat. A caveat can also be lodged by someone with an Australian court order restraining a registered proprietor from dealing with the property.

In NSW lodgement of caveats is electronic by a subscriber to PEXA (such as a solicitor or a licensed conveyancer).

What Detail Does a Caveat Require?

In NSW, when lodging a caveat, you need to include:

  • the caveator’s name and residential address or registered office, including an address for service of notices;
  • the name and address of the registered proprietor (we suggest that you do a title search to ensure the correctness of the information);
  • reference details for which the caveat relates;
  • particulars of the legal or equitable estate of interest;
  • a verified statutory declaration; and
  • the signature of the caveator, lawyer or another agent of the caveator.

What if I Incorrectly Lodge a Caveat Without a Caveatable Interest?

Only someone with a caveatable interest can lodge a caveat. Lodging a caveat without reasonable cause is a serious matter. A court may order you to compensate anyone who suffers a financial loss as a result of your incorrect caveat.

Challenging or Removing a Caveat

Ways in which a caveat can be challenged or removed include the property owner issuing a lapsing notice and the caveator submitting a withdrawal of caveat form.

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Parents lending to their children

Parents making loans to children

To protect your loan to your children do a legally prepared loan agreement.

A Loan to my child seems harsh

There is nothing wrong with helping your children financially. It is becoming increasingly popular to help out children with a home deposit, but giving away the money has real risks. With loans to children, don’t rely on a verbal agreement. A loan agreement protects the money in case for example:

1. a child divorces;

2. a child goes bankrupt;

3. a child develops a drug dependency or a mental illness; or

5. you run out of savings to pay for assistance required in your old age

Documenting loans to children

Rather than giving your children money, why not lend them money ‘payable on demand’? Treat yourself as if you are a bank, and your children are borrowers. You can then call in the loan if something goes wrong.

A loan agreement protects your interests by putting rules about the loan in writing. In future you can forgive the loan, either during your lifetime or in your Will.

Any tax issues?

There are none if the interest rate for the loan is ‘as advised by the Lender’.  Whilst the interest rate is zero there are no income tax issues.

What is the status of a loan agreement vis-a-vie a mortgage?

If you lend your child money and a bank is also providing them with a loan, the bank lodges a mortgage over the property.

Making a Loan Agreement payable “on demand” does not change the precedence of a mortgage over the property over your rights to repayment. However, repayable ‘on demand’ rather than specifying circumstances for repayment (e.g. house sale, separation, divorce) protects you as it extends the circumstances in which the loan is repayable.

Your loan agreement should give you a right to lodge a caveat over any real estate your child owns in Australia. If there is an existing mortgagee it will be difficult to lodge a second mortgage over the property.

Does the bank (with a mortgage over the home) need to be consulted about a Loan Agreement?

Second mortgages are complex, expensive and rare. An alternative is to lodge a caveat over the property with the loan agreement attached after the settlement.

If your child separates, a professionally prepared loan agreement should ensure that the loan is paid out prior to any payout to their ex-partner.

How to lodge a caveat or mortgage in NSW using a loan agreement

  1. All parties sign the Loan Agreement.
  2. Engage a subscriber to PEXA (such as a lawyer) to electronically register a caveat or mortgage against the title of the property with NSW Land Registry Services.
Conclusion

When making loans to children:

1. talk with all your children about the proposed loan;

2. to protect you and your children – lend (not gift) them money

3. don’t rely on verbal agreements –engage a solicitor to draft a loan agreement

Child Loan Agreement on back of an envelope?

Recording a ‘minute’ or IOU on a piece of paper is not sufficient evidence of the existence of a loan. Only a legally prepared loan agreement satisfies the ATO, Bankruptcy Courts and Federal Circuit and Family Court as to the existence of a loan.

Son refuses to repay father

In Berghan v Berghan [2017] QCA 236 a son refused to pay back money he borrowed from his aged father.

The son’s company suffered financial stress. The father lent his son money. The son then spent more using his father’s credit card.

The District Court held that there was no written loan agreement, the father failed to prove a legal binding agreement, and that the monies were a gift.

The Judge determined that:

  • The son’s promise to look after his father in old age was just a moral obligation.
  • In making the payments to the son, for the benefit of the company, the father was simply discharging his parental obligations. This is because the son’s daughter was an employee at the son’s company. The money was therefore of a charitable nature. The father was protecting the son’s company so his daughter would keep her job.
  • The father allowed the son to use the credit card when the son was injured and impecunious. These circumstances are charitable.

The Court of Appeal overturned the District Court decision, holding that the amounts were loans and that a child loan agreement was inferred.

In setting aside the decision, the Court determined that:

  • The lengthy period it took the father to demand the money did not count against his assertion that a breach of contract existed. Post-contractual conduct is not taken into account when interpreting the terms of a contract.
  • The father’s motivein transferring the money to the son was not relevant.

The Court said that it was an “inescapable conclusion” that the monies were paid with an understanding that they would be repaid. The transactions amounted to a loan contract.

This decision illustrates the perils of not signing a loan agreement.

Additional money to help child buy first home

If you want to help your child with the deposit on their home or they need more equity, you can do a loan agreement and lodge a caveat over the property after the mortgagee has registered the mortgage.

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Capital Gains Tax Rollover Relief

Capital Gains Tax

Capital Gains Tax (“CGT”) is payable pursuant to the Income Tax Assessment Act 1997 (“ITAA”) on the disposal of assets purchased after 20 September 1985. CGT is payable on and is applied to the profit made from the sale, transfer or disposal of an asset to another person or entity. It applies to all assets but there are exceptions including:

  • the parties’ main residence (i.e. the former matrimonial home);
  • cars and motorcycles;
  • personal assets (such as a boat or household furnishings) purchased for under $10,000.00; and
  • collectables (such as artwork, jewellery, antiques or a wine collection) valued at less than $500.00.

An adjustment of property between parties to a marriage or a de facto relationship involving the sale, transfer or disposal of an asset may give rise to a CGT event.

The former Matrimonial Home

If the former matrimonial home has been the parties’ main residence, it is one of the exceptions under the ITAA and selling, transferring or disposing of it will not attract CGT. If however the property was not the main residence of the parties for a period, the situation may be different. If, for example, the property is rented out as an investment property before the parties live in it as their main residence. In such a situation, a sale, transfer or disposal may attract CGT but the assessment will be restricted to the period during which the property was rented out.

Investment Property

CGT will be assessable on the profit from the sale of an investment property or another non-exempt asset as part of a family law property settlement. It is important that a property settlement considers the payment of CGT on the sale of an asset. If the property is in the parties’ joint names (or an entity controlled by both parties), then both parties will be assessed to pay CGT on their share of the profit. If the property is in the name of only one party (or an entity controlled by one party), then that party will be assessed to pay the CGT. Discounts may apply to reduce the ‘profit’ on which the CGT is assessed.

CGT rollover relief

Where a CGT-liable asset is transferred between the parties (rather than sold) then normally CGT would apply to the transfer. If, however, the transfer of the asset is a consequence of the breakdown of a relationship, then sec 126 of the ITAA allows for “rollover relief” on the transfer. CGT can be disregarded until the party receiving the asset sells, transfers or otherwise disposes of it.

For example, CGT is not payable at the time when an investment property is transferred to a party following the breakdown of a relationship. The party receiving it will be liable to pay the tax on any gain made on a subsequent sale or transfer of the asset.  The CGT is calculated as though that party had owned it since their former partner acquired it, including using their former partner’s cost base for the asset.

Rollover relief only applies if:

  • If the asset is transferred between parties to a marriage or a de facto relationship or from a company or a trust to one of the parties; and
  • The transfer is made in accordance with a court order, an arbitration award, or a financial agreement under the Family Law Act.

Will CGT be included in the property pool?

The leading authority on CGT is the case of Rosati and Rosati, where the Full Court of the Family Court outlined the following principles:

  1. Whether the incidence of CGT should be taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the particular asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
  2. If the Court orders the sale of an asset, or is satisfied that a sale of it is inevitable, or would probably occur in the near future, or if the asset is one which was acquired solely as an investment and with a view to its ultimate sale for profit, then, generally, allowance should be made for any capital gains tax payable upon such a sale in determining the value of that asset for the purpose of the proceedings.
  3. If none of the circumstances referred to in (2) applies to a particular asset, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to midterm, then the Court, whilst not making allowance for the capital gains tax payable on such a sale in determining the value of the asset, may take that risk into account as a relevant s 75(2) factor, the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the sale may occur.
  4. There may be special circumstances in a particular case which, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of capital gains tax into account in valuing that asset. In such a case, it may be appropriate to take the capital gains tax into account at its full rate, or at some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs.”

Whether CGT will be taken into account in calculating the net asset pool will depend upon the circumstances of that individual case.

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