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:
Copies of the following documents will help you to better understand the SMSF:
- the most recent up to date Trust Deed.
- 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.
- The three most recent years financial statements, to:
- augment your understanding of the nature of the SMSF’s assets and its financial position; and
- show whether the SMSG has been audited and any areas of concern as to compliance.
- Member Statements.
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:
- The financial statements are usually prepared annually, and the values ascribed to the assets as at that date may be out of date;
- Interest on dividends could have accumulated and taxation and other expenses could have been incurred since the financial statements were prepared;
- The financial accounts may contain reserves, where some of the SMSF’s assets have not yet been allocated to its members;
- 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:
- 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
- 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:
- 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;
- 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
- 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.