Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 377

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.

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.

 

10 Comments
Donald
January 27, 2022

Hi

good article.

If an equity portfolio held within a SMSF is liquidated for the express purpose of creating cash to pay out one member will this attract a capital gain? If one does not want another SMSF for example but wants to use an industry fund etc. Surely this happens quite a lot - I am imagining one half of a couple may be less financially savvy or just not interested in the complexities of a SMSF

regards

Trevor Vas
October 07, 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 05, 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
September 30, 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
September 30, 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
September 30, 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
September 30, 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
September 30, 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
September 30, 2020

Great article and very relevant to my clients.

Thanks Alex

 

Leave a Comment:

RELATED ARTICLES

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

Meg on SMSFs: Timing and the new super tax

Meg on SMSFs: should I start my pension before selling assets?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.