A marriage breakdown and the subsequent split of assets is always complicated. If assets are held within a Self-Managed Super Fund (SMSF) then there are further complications.
The SMSF sector now accounts for around a third of Australia’s total superannuation savings and according to the latest Tax Office statistics, around 70% of those are two person funds. This probably means that over one million SMSF trustees in this country are husband and wife. The Bureau of Statistics estimate that around one in three marriages will end in divorce so splitting assets from a SMSF could become a major issue.
So what complications arise from the marriage breakdown of SMSF trustees? It’s common for the SMSF to own the business premises and sometimes the only way to realise the value of the asset is to sell the business premises. In many cases the business may not be able to afford to purchase the property from the SMSF and in all likelihood, at least one of the divorcing couple will want to exit the business as well.
In other superannuation funds, the members and trustees are separate individuals, however, SMSF members will need to continue to interact with each other whether they like it or not. If both members are also trustees they will need to perform tasks such as signing cheques, preparing tax returns, financial statements and make investment decisions etc.
So whatever the personal feelings of the SMSF trustees, they must continue to act in accordance with superannuation laws and the trust deed of the fund. The SMSF regulator states that despite personal difficulties on an individual basis, “as a trustee you must continue to act in the best interests of all members at all times”.
The Tax Office has stated that SMSF trustees must (in any circumstance):
Apart from the issue of a business premises being owned by a SMSF, there might be other types of assets held by the SMSF which would need to be valued before a divorce settlement can be agreed upon or settled in court. Where the divided assets held by the SMSF are rolled over into one or more new funds, it is important that these assets are not first sold for cash. The cash proceeds transferred to the new fund would not retain their original cost base for Capital Gains Tax purposes and any concessions would be lost if a cash value is realised before it is rolled over. Similarly, under normal circumstances SMSF rules disallow the acquisition of assets from related parties, however, the legislation was amended specifically to allow such a transaction in the specific case of marriage breakdown (applies to assets acquired on or after 17th November, 2010).
There are steps that can be taken to minimise the impact of divorce when initially setting up the SMSF. For example, using a corporate trustee. In the case of the business premises being the major asset of the fund, if the premises had been acquired under a unit trust structure and the fund had an investment strategy utilising unit trust structures, then the fund’s corporate trustee could redeem units for cash to payout the spouse. The corporate trustee could then take out a limited recourse borrowing arrangement to acquire a beneficial interest in the same business premises.
This illustrates the importance of the structure and strategies when setting up a SMSF. If you are thinking of starting a SMSF make sure you consult with us first because prevention is always better than the cure.
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IMPORTANT DISCLAIMER:This newsletter is issued as a guide to clients and for their private information. This newsletter does not constitute advice. Clients should not act solely on the basis of the material contained in this newsletter. Items herein are general comments only and do not convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas.