Superannuation and divorce

Information for advisers only.

Superannuation legislation allows the benefits of one member being divided, with a portion allocated to their ex-spouse in the event of a divorce or separation, to facilitate an effective property split. The portion split is not considered a withdrawal or a contribution and the new interests must each have preservation components and taxation components in the same proportion as the original interest.

This includes same-sex couples who can obtain a superannuation split by having a recognised property settlement as above.

Over two-thirds of SMSFs are two member funds, with the vast majority of members being couples. When there is a property settlement resulting in a super interest split, the trustees have a number of options and there are three concessions they’re eligible for.

CGT rollover relief

The first concession allows the transfer of assets from an SMSF in satisfaction of a super split, or to facilitate the transfer of benefits of the departing member to be treated as a rollover for CGT purposes. This results in the transferring fund disposing of the asset without raising a CGT liability and the receiving fund acquiring the cost base of the disposing fund. Plus, if the asset was a pre-CGT asset in the transferring fund, it will be a pre-CGT asset in the receiving fund.

This concession gives trustees the ability to transfer shares and units in managed funds from one SMSF to another without triggering a capital gain. Where the dominant asset is a property the trustees/members don’t wish to sell, and neither party has sufficient benefits to acquire, it’s possible to split the ownership of the property into two tenants in common interests - one owned by the original fund and the other owned by the new fund. The CGT rollover relief would also apply in this case.

Alternatively, the ex-spouses can remain members of the existing fund until the property is sold. The departing member could then rollover their benefits to a new fund. However, a significant risk with this strategy is that one trustee of the fund may not act in good faith towards the other party.

Acquisition from a related party relief

Where an SMSF acquires an asset from another SMSF because of a super split, the disposing SMSF will be considered a related party of the receiving SMSF. While this would normally preclude the transfer of assets such as residential property or private company shares, there is relief from the general prohibition where the asset is acquired due to a property settlement split or a transfer of the receiving fund member’s interest where there has been a relationship breakdown.

In-house assets

The third concession relates to the exemption from the in-house assets test for particular investments in pre-1999 unit trusts. These investments are exempt from the test as long as they were acquired before 11 August 1999 or were made under one of the transitional rules. Where the receiving SMSF acquired these units as part of a property settlement, it could result in them being assessed as in-house assets and subject to the 5% threshold, however the concession means that for the in-house assets test, the investment will be deemed to have been acquired when the original fund acquired it.

Things to consider

While these concessions provide a number of options on how to effect a super interest split, it’s important they don’t cause ‘analysis paralysis’ whereby no decision is made, particularly in the SMSF environment. This will result in a divorced couple being responsible for the running of the SMSF, even if there’s been a breakdown in communication.

While all SMSF trustees should be vigilant in administering their fund, this becomes even more important where the trustees are married and the marriage has failed. Particularly if the dispute is acrimonious, one party may destructively abuse their powers of trustee. In these cases, it would be worthwhile for trustees to consider becoming a Small APRA Fund, if possible.

Case study

In 2011, the Administrative Appeals Tribunal (AAT) handed down a decision in relation to the Shail Superannuation Fund which had as trustees Mr Mustafa Shail and Mrs Nuriye Shail who had divorced some time previously. In 2005, Mr Shail transferred $3.46 million from the SMSF to an account in his name in Turkey even though no condition of release had been met.

The following year, the ATO made the fund non-complying, resulting in a tax liability of approximately $1.58 million and issued a penalty of $1.48 million. Mrs Shail appealed to the AAT that she was not liable for these debts (as trustee or otherwise) as she was unaware of the withdrawals.

While the AAT acknowledged that the funds were taken “without the knowledge or consent of Nuriye Shail and that Mrs Shail had received no benefit from the transaction”, it established that each trustee had an obligation to ensure such a withdrawal couldn’t take place. The result was that even though the tribunal stated “it is not difficult to feel sympathy for the plight of Mrs Shail”, it found the original ATO decision correct.

Next: Comparison: Transfer balance cap versus total super balance