Clean break: Splitting super upon divorce

Happily ever after isn’t a reality for many couples. So, how is superannuation divided after a divorce or relationship breakdown, and what do couples in SMSFs need to consider?

Even if a divorce or relationship breakdown is amicable, splitting superannuation as part of a family law settlement can be a complex process. And it can become even more complicated if the couple have their own SMSF.

But with superannuation often being the second biggest asset aside from the family home, it’s important to get the details right to eliminate financial risk now, and enhance future financial security.

How superannuation is valued

The superannuation splitting laws require the family court to determine the value of the superannuation interest before it makes an order for payment splitting.

Because assets in an SMSF can be diverse, there is no standard approach to valuation. Usually an independent expert valuer, such as an accountant, will be chosen by the parties. Otherwise a court appointed expert valuer can also conduct a review of the fund.

Once the fund’s valuation is complete, the court is likely to make a superannuation splitting order. The splitting order will depend on the type of superannuation interest and whether it is in the accumulation or pension phase.

How superannuation can be split

Separating couples have three options for splitting their superannuation.

1. Enter into a formal written ‘superannuation agreement’ (ie, binding financial agreement) to split superannuation.

A superannuation agreement forms part of a binding financial agreement, which allows separating couples who can reach agreement on a property split to do so without having to go to court. These agreements can be put in place before, during or after a relationship and specify how the couple’s property, including their respective superannuation interests, will be divided.

2. Seek a ‘consent order’ from court to split superannuation.

This option is available to separating couples who do not have a binding financial agreement but have agreed on how they want their superannuation to be split.

3. Seek a ‘financial order’ from court to split superannuation.

This option will set out how superannuation will be split if both parties cannot reach agreement.. In this case, the separating couple must apply for financial orders and a court hearing will determinehow superannuation is to be split. Note that time limits apply (ie, within 12 months of a divorce order taking effect, or within two years of the breakdown of a de facto relationship).

Capital gains tax issues

When superannuation is split under the superannuation splitting laws, one of the spouses will generally transfer their balance out of the SMSF to another SMSF or to an APRA regulated superannuation fund.

Transferring the ownership of assets, such as shares or managed funds inspecie, from one party to another or selling down assets to cash to effect a transfer will trigger a sale event for capital gains tax (CGT) purposes within the SMSF.

The good news is that any assets transferred between the parties will usually qualify for CGT ‘relationship breakdown rollover relief’. This means CGT, which normally applies when ownership of an asset changes, is not triggered in the transferring SMSF and CGT will be deferred.

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 eventually sold by that fund.

Other considerations for SMSF trustees and members

In certain and very rare circumstances, some separated spouses may wish to remain as members of the same SMSF. This may occur because they are still on good terms with the other fund members / trustees or there may be certain assets in the fund that would need to be sold if they wanted to leave the SMSF and move to another fund, but the timing is not right to liquidate them.

However at some point, the SMSF trustee will need to decide if they want to remain in that SMSF, open a new SMSF, or move to a different superannuation fund.

The last word

Regardless of how amicable the break up is, separating couples should seek specialist legal, financial and tax advice to ensure their financial affairs are being well managed. This should be the case even if the parties agree on what should happen to their superannuation benefits.

Simply recording and signing a resolution giving effect to a verbal agreement is disastrous and can cause adverse tax consequences and risk of non-compliance with superannuation law for the members and the fund.

It’s never too late to put a plan in place – remember, a superannuation agreement can be made before, during or after a relationship breaks down.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.