SMSFs after divorce?

The dissolution of a marriage or long-term relationship can be a devastating event, and managing SMSFs after divorce or separation can have significant implications for each individual’s financial well being. 

In Australia, SMSFs are a popular investment option for many individuals, particularly families and long-term partners. As such, the proper management of an SMSF following a divorce is paramount. 

What is an SMSF?

SMSFs are a type of superannuation fund that is typically established for a small group of individuals who wish to take a more hands-on approach to managing their retirement savings. Unlike traditional superannuation funds, SMSFs allow members to control the investment strategy and the assets held within the fund. SMSFs are governed by the Australian Taxation Office (ATO) and are subject to strict rules and regulations.

SMSFs After Divorce

The fate of an SMSF following a divorce largely depends on the specific circumstances of the parties involved. 

Super balances are classed as property or marital assets, which make up the asset pool to be divided upon the breakdown of a relationship, be it a formal marriage or a de facto relationship. In some cases, the SMSF may be maintained as a joint asset, with both parties continuing to contribute to the fund and share in its returns. 

More commonly, the SMSF may be divided between the two parties, each receiving a portion of the fund based on their respective contributions.

Managing SMSFs After Divorce

Dealing with SMSFs after divorce can become cumbersome, and it is essential to seek the advice of financial and legal professionals with experience in this area. 

Factors such as tax implications, compliance with superannuation regulations, and the fund’s valuation must be carefully weighed to protect both parties’ interests.

Further nuance arises due to the range of investments that may be incorporated within an SMSF. 

As SMSFs are set up as retirement funds, the assets held within them may not be able to yield profits for quite some time, or may be undermined if sold before allowed to mature. 

In these cases, the split may take the form of a flag on the investment to be apportioned at a later set date.

Apportioning Splits in SMSFs

Splits in SMSFs will typically follow a proportion or set figure allocated to each party.

This figure will be determined on a case-to-case basis, be that through previous agreements, amicable negotiation or other legally binding means, taking into account a multitude of entitlements and future responsibilities. However, it is important to note that it is not possible to negotiate an uneven split of exactly which assets within a super fund will be allocated to whom.

The split must align evenly with the decided ratio, meaning that the balance of tax-free and taxable components must be equal for each party. 

For example, one party cannot be given all tax-free assets while the other takes the taxable assets. Instead, both parties would be required to take a balanced proportion of taxable and tax-free assets.

Steps in Splitting an SMSF

Splitting an SMSF involves a few steps that can be complex and require the assistance of legal and financial professionals. 

The first step involves the valuation of the SMSF assets, which is crucial to determine the value of the fund and each spouse’s share. 

Once the valuation has been carried out, the split is then agreed upon by both parties, and it is usually based on their respective contributions or other legally binding means. 

The next step is to draft a binding financial agreement or court order outlining the agreed split. The SMSF trustee then implements the agreement and splits the fund’s assets accordingly.

One Spouse to Remain and One to Exit

In some situations, one spouse may wish to remain a member of the SMSF while the other spouse wishes to exit. 

In such cases, the exiting spouse can transfer their share of the SMSF’s assets to a complying super fund, either a retail superfund or another SMSF. 

Before making the transfer, the exiting spouse must ensure that the receiving fund complies with the superannuation regulations and that the transfer does not attract tax liabilities or penalties.

Tax Considerations

Tax implications are a significant consideration when splitting an SMSF. Any taxable income generated by the SMSF assets after the split is subject to tax at the applicable tax rate. 

Additionally, if an asset is sold, capital gains tax may apply, depending on the circumstances. 

It is, therefore, essential to seek professional advice to ensure that the tax implications are carefully considered in the agreement.

Dissolve the Current Fund and Roll Out the Balance

Another option available to separating spouses is to dissolve the SMSF and roll out the balance to a retail superfund or another complying SMSF. This option can be useful if the fund’s size is small or if the parties do not wish to continue with the SMSF structure. 

However, there are some things to consider before making this decision. For instance, it is crucial to consider the cost implications, as rolling over an SMSF can be expensive, and the new fund’s fees can be higher. 

Additionally, care should be taken to ensure that the new fund is compatible with the separating spouses’ investment objectives and risk tolerance.

In conclusion, splitting a SMSFs after divorce is a complex process that requires careful consideration of the legal, financial, and tax implications. 

Seeking professional advice is crucial to ensure that all parties’ interests are protected and that the agreed split aligns with the superannuation regulations. 

If one spouse wishes to exit the fund, transferring their share to a complying superfund requires careful consideration of the receiving fund’s compatibility and tax implications. 

In contrast, dissolving the SMSF and rolling over the balance to a new fund may be more suitable for some situations. Whatever option is chosen, the parties involved must approach the process with care to safeguard their financial future. 

Conclusion

In accepting the advantages of an SMSF, a couple also accepts the risks involved, and relationship breakdown is one of these risks. 

Yet if parties can stay level-headed or hire someone who is, they may avoid many negative impacts on their retirement. 

Thus while the process may be complex, the fate of an SMSF following a divorce is primarily determined by the parties involved and their decisions, and it is essential to approach the management of an SMSF with care and attention to secure the financial future of all parties involved. 

If you are currently dealing with a separation or divorce, feel free to contact Movement Legal. You can book a free chat with us here.