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The impact of our marriage breakdown on our SMSF

My husband and I separated last year after being together for 11 years and married for six (it’s ok though, we are keeping it nice – we just weren’t meant to be). My reason for this overshare is not to garner sympathy, but to talk about managing relationship breakdowns in an SMSF and what better case study to use than myself.

As I said, we are keeping it nice, and are in the throes of finalising our property settlement DIY style without lawyers if we can help it. Together we have an SMSF which of course also needs to be dealt with. Managing the impact of a relationship breakdown on an SMSF needs special consideration and is often mishandled, so I thought I would highlight some of the issues.

These days superannuation is one of many assets that are considered ‘property’ and can therefore be formally divided (or ‘split’ as it’s referred to in the legislation) as part of a divorce. The same applies to the breakdown of a de facto relationship in all states except (currently) Western Australia (this wasn’t always so).

Splitting super balances in an SMSF

The way superannuation can be divided is set out in the Family Law Act, and the superannuation law (the SIS Act and Regulations) contains specific rules that allow funds to re-assign some or all of a person’s superannuation to their soon-to-be-ex spouse or partner. Whilst these rules are valuable, they are not always well understood, and in some cases don’t operate so well.

1. Better get a lawyer

Firstly, superannuation interests can’t be ‘split’ on a handshake or under the separating couple’s own arrangements, the law simply does not allow that. Deciding, amicably, that “Bob can have the SMSF” isn’t enough.

To split superannuation interests, the law requires that the parties either make a ‘Superannuation Agreement’ (which has a range of legal requirements including that each party must obtain legal advice) or by Court Order (and it’s usually recommended – but not compulsory – that legal advice is obtained for that too).

In our case, we have agreed to keep our own superannuation balances, we are not splitting anything, so it appears that we don’t have to worry about getting lawyers. But not so fast – one of us needs to roll out of the fund eventually. We may be friendly, but still both keen to unravel our entwined financial matters.

Without a Superannuation Agreement or Court Order, rolling out may mean missing out on some special rules around …

2. Capital gains tax

When superannuation in an SMSF is split under the relationship breakdown laws, generally one of the spouses will then transfer their balance out of the SMSF to another fund – be that another SMSF or a retail fund.

In normal circumstances, a transfer out of assets in specie or the sell down of assets to cash to affect a transfer will trigger a sale event for capital gains tax (CGT) purposes within the fund. However, special rules apply such that where a spouse transfers out assets (for example listed shares or units in managed funds) under these laws, CGT is not triggered in the transferring SMSF. The cost base of the asset is transferred from the SMSF to the receiving fund and the receiving fund will realise a capital gain or loss when the asset is ultimately sold by that fund.

Remember my ex and I are not splitting our super, our own balances remain our own. Most of the investments in our SMSF are listed shares and overall (due to my – cough, cough - brilliant investment management skills) they have increased in value.

If I simply transfer my balance out to a new SMSF (or Wrap account) by transferring shares in specie, those special CGT rules won’t apply without a Superannuation Agreement or Court Order. The transfer of the shares will trigger a capital gain in the original fund and my ex will cop the CGT that results whilst I will enjoy reset cost bases in mine (second thoughts, that doesn’t sound too bad).

Planning for the CGT impact requires specialist knowledge and skills, and unfortunately many divorce lawyers are not really across those issues. This is where an accountant and/or financial adviser needs to step in.


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3. Don’t die until it’s done

Another issue we (or more accurately, I) have come up against is estate planning. Until the property settlement is complete and one or both of us is extracted from the SMSF, what happens if one of us dies?

We’ve taken a long time to get to the property settlement as we agreed it was easier to sell our property (a farm), pay out our combined debts and split the cash before we bothered. The farm was on the market for quite some time before it has finally sold.

In hindsight that decision has put me in a position of considerable risk. As we had a substantial mortgage, we both hold death and TPD insurance policies in the fund. Of course, the idea behind that was that if something happens to either of us, the survivor can pay out the debt with the proceeds and not lose our home.

The risk is my ex is in a de facto relationship so until we divorce, technically he has two spouses. If he pops his clogs, she has a claim on his super benefits – including his life insurance proceeds - as his superannuation dependant.

After we are debt free and everything is officially split and settled, good luck to her, but in the meantime, without a legal agreement in place, I’m running the gauntlet hoping he doesn’t die. Yes, there are binding nominations for that, but there’s nothing stopping him from changing it or changing his will to include her and lock me out.

And vice versa. What’s to stop me from making a binding nomination to my estate and a will gifting everything in trust to our daughter leaving him with the debt and no insurance proceeds to pay for it if I die? Nothing.

The moral of the story is, no matter how friendly, the property settlement really should have been taken care of soon after separation to prevent those problems arising. I’ll remember that next time ...

 

Alex Denham is a Senior SMSF Specialist at Heffron SMSF Advisers. This article is general information and does not consider the circumstances of any individual.

 

9 Comments
Trevor Vas
October 08, 2020

Really interesting article, while I am not planning to get divorced I got a lot of distinctions from reading this thank you.

John
October 06, 2020

One the best financial moves is to protect your marriage.

MM
October 06, 2020

Thank you , Alex. I experienced all this myself in similar circumstances. Still in the process of extricating from the joint SMSF after years, I now advise people not to have joint funds. Ours was set up around 1995 when SMSFs were in their infancy. All the best to you.

Graeme Bennett
October 01, 2020

Good luck Alex. A lot of pain might have been saved if two SMSFs had been set up initially but I guess that would have doubled the cost and the confusion. Signals the contemplation of a breakdown in the relationship too early as well. As good as a pre-nup to say 'I don't entirely trust you'.

Glad it has been a civilised parting - that makes the next stage in your life so much less conflicted.

Michael
October 01, 2020

Blokes with no assets are a lot less confusing and those are the ones that never fall off the perch early either ...

SMSF Trustee
October 01, 2020

I'm surprised that your husband's new relationship can have anything like the legal status of the one with you, until your divorce is finalised. He cannot have 'two spouses' under the law. I was under the belief that, when a legally-recognised relationship breaks down, the law requires at least a 12 month gap before that relationship is formally and legally ended. That's what my son had to wait to finalise things after his wife walked out on him a while back. So a new one cannot commence that gives any priority to the 'new woman' before things are sorted with the 'old woman'. Could a legal person provide some further information on this, please?

Alex Denham
October 01, 2020

Thanks for your very valid comments. Unfortunately the superannuation laws - which determine to whom a benefit can be paid - do not have those distinctions. Simply, “dependents” are defined under the SIS legislation and these beneficiaries take priority. Dependents include a spouse and a de facto is included in the spouse definition. Granted she would have to take me to court to argue her case but it’s not beyond the realm of possibility of her having a claim given we’ve been separated well over a year and they have been living together for the same period. But I agree a comment from a legal angle would be interesting.

Terry
October 01, 2020

Sorry things didn't work out for you. Thank you for the article. You make some excellent points in talking about the legal issues of divorce and property. All those separating should read your article. Rarely talked about from someone who went through it. Amicable does not mean easy. Caveat emptor.

Graeme Colley
October 01, 2020

Great article and very relevant to my clients.

Thanks Alex

 

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