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Self Managed Super Fund (SMSF) Article
Super Funds and Divorce
By Tony Negline.
This article may be out of date.
24th November 2004
The number of applications for formal marriage separation has dramatically increased in the last year.
One reason for the increase is the new laws that permit super assets to be an asset which can be split between the parties.
Agitation for this significant change had been made for about twenty years before the government in 1998 finally announced plans to do something about it.
The rules came into force in December 2002.
No area of superannuation law is easy or straight-forward including the rules that surround splitting super assets on divorce. For example, Steven Lamont, a family law specialist based in Sydney points out that not all assets can be split under these asset splitting laws.
Trustees of small super funds, such as Self Managed Super Funds, need to be careful that they discharge their trustee duties as well as making sure they look after their own personal issues.
“There are two processes at play here,” said Traicha Aspley of Aspley Jandera Super Specialists. She says that as SMSF members will also be the fund’s trustees, they must make sure they follow all the relevant procedures the super and divorce rules impose on a trustee.
The rules impose stringent requirements on trustees and if these rules are not followed then penalties may be imposed. It follows then that super fund trustees who are inexperienced in dealing with these rules should consider seeking the assistance of professionals who specialise in this area of the law as well as its practical implications.
Aspley says that “SMSF members should get some sort of financial advice. Decisions about how super benefits should be split are important for a member.” What are the implications of keeping all the super but not having anything to live on? What would be your Reasonable Benefit Limit position if a benefit was taken in a number of different ways? There may also be estate planning or social security implications.
Aspley says these are all issues which involve providing financial advice and anyone providing this advice should be appropriately qualified and licensed.
Lamont agrees that looking at all these issues can be complex and that it may be helpful to seek expert financial advice.
Stephen Bourke of SuperSplitting, a law firm specialising in these super and divorce splitting rules says that the Australian legal system is adversarial and a lawyers job is to advance his clients interests. Some individuals, and even their advisers, might agree to arrangements which appear more favourable but in fact are not as good as they appear. It is up to each party to determine whether a proposal suits their requirements.
A SMSF with two members, husband and wife, who are getting divorced, will almost certainly involve one of the members moving to another fund. This may entail moving the market value of the departing member’s account balance as well as an agreed amount of their former spouse account balance.
These are two different amounts and must be noted as such. Aspley notes that these payments require totally different reporting requirements and also probably give rise to different income tax outcomes for the super fund. It is important to ensure that these super fund tax issues are sorted out with 100% accuracy so that one member does not proportionately pay more tax than the other member.
One common complex tax issue to solve is Capital Gains Tax.
Bourke claims that he has found a convenient way around this CGT issue. He points out that when a member’s benefit leaves a fund, CGT will be payable. However there is no CGT when a benefit leaves a fund as part of a divorce settlement (formerly called a “payment split”) because there is a specific CGT exemption. Bourke overcomes the CGT problems by splitting benefits.
Some super specialists argue that Bourke’s strategy could lead to claims of income tax anti-avoidance provisions applying. Bourke says he solves this by getting a Private Binding Ruling from the Australian Taxation Office.
When the separating parties agree on how their collective assets should be split the Court will confirm this agreement. If agreement cannot be reached then the Court can decide how assets should be split. Lamont points out that in all cases, the Court can only agree to a “just and equitable” split.
One possible way to negate the need to use these splitting provisions is the create a binding Financial Agreement. These agreements, which must be in writing, can be made before, during and even after a marriage. Lamont says that such agreements are not especially popular and can be set aside by the court.
All the above caters for married couples. What about those involved in defacto relationships? Some State Governments (New South Wales, Victoria, Tasmania and Queensland) have given the Federal Government the power to regulate the fair and equitable split of defacto assets. The Federal Parliament is expected to consider enabling legislation reasonably soon. Western Australia has only given the Federal Parliament the power to split superannuation assets. South Australia has refused to give the Commonwealth any power to split super assets. Residents of the Northern Territory and the ACT are automatically covered by any Federal legislation.
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