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Self Managed Super Fund (SMSF) Article
Changes to Super and Divorce Rules

By Tony Negline.

This article may be out of date.

6th December 2006

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A major change which the Howard Government brought to superannuation is the ability to separate assets as a result of divorce.  The rules to allow the movement of assets are long and complex.  Sadly the laws are incomplete and contains holes and inconsistencies which either causes problems or forces everyone to find work around solutions.

Over the last few months the ATO has introduced two changes to the super and tax laws to allow for a smoother operation of the rules when a person is getting divorced.

Last September the tax office released a modification involving Self Managed Super Funds acquiring super assets from another super fund as a result of divorce.  Before we discuss how these rules work it is essential to provide some background.

A well-known rule is that super funds cannot acquire assets from parties deemed to be related to the fund.  At a basic level the following are all related parties – fund members, all relatives of those members, some employer sponsors of the super fund.  But all companies, trusts and partnerships controlled, or deemed to be controlled, by fund members, their relatives or employer sponsors are also related parties.

There are some specific exemptions to this rule.  Listed securities, widely held trusts (such as publicly available managed funds) and business real property and three very well known exclusions.

Under current laws it is possible to split super assets between a couple as part of the financial settlement established either by mutual agreement or court order.  The settlement will either specify a particular percentage or a specific amount.

When a couple who are both members of the same super fund divorce it is often better for one of them to move their super assets to a new fund so that there is a clear separation.  Some separating couples prefer to remain the in the same super fund after they are no longer married however experts in this area often advise their clients that in the medium to long term this is not wise.

A superannuation fund cannot acquire an asset from the trustee of another superannuation fund where the trustee of the transferring fund is a related party of the new fund.  The only way around this problem is for the transferring fund to sell assets and transfer cash.  This will work in situations where both parties have no attachment to a particular asset.  Clearly this may not suite some situations where one or both parties would like to keep a particular fund asset.

For example suppose a super fund has listed shares and a property in the fund (recent research shows this is very common).  Assume that the property is not business real property.  The divorcing couple has decided that the wife will leave their current fund and will join a new one.  The biggest problem is that she wants to move the property into her new fund.  (You might be wondering why the ex-husband can’t move to a new fund thereby circumventing the problem with moving the property.  There may be valid reasons as to why he can’t move his account balance out of the existing fund.  For example a tax penalty might apply.  Sadly when people are solving these problems logical is often forgotten.)  Under current laws it would be difficult to achieve this because the new fund would always been seen as related to the existing super fund.

The ATO’s modification will allow non-cash assets to be transferred if the assets are being moved as part of a divorce settlement.  The ATO have been very generous and have back dated this exemption to 28 December 2002 which is the date when the superannuation and divorce rules came into force.

Ordinarily when a super fund sells an asset which is not being used to pay a pension then Capital Gains Tax will be payable.  This is the case where a super fund is moving or transferring an asset to another super fund.  However under tax law there is a specific exemption that allows a super fund to avoid CGT if the asset is being sold or transferred as a result of a superannuation divorce settlement.

The second tax office change concerns the payment of pension from any super fund.  When a couple divorce and they agree, or the Court decides, that a pension payments should be split between the couple then the current laws do not allow the annual tax free amount cannot be split between the couple.  This means that under the current rules a divorcing couple can loose tax concessions if a pension payment is split as part of their settlement.

In Tax Determination TD 2006/34 the ATO have agreed that the annual tax-free payment can be split between the couple.  There are some important qualifying rules that apply to this new concession so seeking good advice is likely to be sensible.  However the tax office say that if you fail any of these qualifying rules you should consider applying for a private ruling.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

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