Dividing assets during a separation or divorce is never easy, but when your superannuation is in a self-managed super fund (SMSF), it’s even more challenging to determine the valuation of the assets, then come to an even and equitable settlement.
Unlike using a default managed super fund or defined benefit super, where your employer is responsible for making the investments, individuals who opt for the SMSF route set up a trust for their investments. The SMSF sets up the trust, with trustees-typically being you and your spouse–to hold the assets in trust for the benefit of others. SMSF beneficiaries are usually the trustees, making it a little tricky when the trustees have dissolved their personal relationship.
When going separate ways, there are some possibilities and considerations associated with your self-managed super fund. Below we share two possibilities and two considerations to explore, especially if you intend on maintaining an amicable relationship after your divorce.*
Consideration: Abide by the SMSF trust deed
The SMSF’s foundation document is the trust deed, which defines the rules of the road for operating the fund.
The trust deed lays out the guidelines for establishing and operating your fund. It includes such things as the fund’s objectives (building income for retirement), who can be a member, and whether benefits can be paid as a lump sum or income stream. The trust deed and super laws (Superannuation Industry {Supervision} Act, SIS) together form the fund’s governing rules.
In most SMSFs, spouses are co-trustees of the super, and even though your relationship has dissolved, you still have a fiduciary responsibility as a trustee. You must still act in the best interests of the SMSF–no revenge investing allowed–and comply with super regulations. Since trust between parties may be in short supply during settlement negotiations, hiring outside attorneys and accountants is your best bet to ensure a complete and accurate valuation.
Obtaining legal counsel also takes the stress out of dealing with what may well be an uncooperative ex-spouse or combative attorney off your hands.
Consideration: How SMSFs are valued
There are several key factors to a settlement, but the primary one is the valuation of the assets. When your super is a SMSF, the investments are not likely to be traditional equities where you get a statement every month, but rather things like real estate, bonds, shares, cryptocurrencies, and other assets that are difficult to value. Seeking an accountant who specialises in super valuation is your best bet to value the SMSF fairly.
Possibilities: How SMSFs are divided
Supers are typically only part of the marital asset pool, but the balance of which spouse contributed more financially varies greatly. If each spouse has similar earning capacity and relatively similar super balances, they may simply retain their personal accounts and divide the remainder of the property. If, as is more typical, one party has been in the workforce, and the other has stayed home with the children, the super valuations will likely be unbalanced. It’s important to remember that fair and equitable does not mean splitting the SMSF down the middle. One party may be required to roll over a portion of their super to the other to even things out. The Australian Family Court considers each party’s earning power in making this decision.
When the SMSF is split between the parties, there are several options at hand. For example, if overall assets are substantial enough, one party may choose to keep the entire SMSF while the other retains the other assets. Another might be to split the balance evenly, or to transfer the balance to the other partner’s super.
How the value is determined can either be a percentage of the value, or a predetermined number as of a given negotiated date. It’s extremely important that you discuss and consider your overall financial situation with your accountant and financial advisor so you can be aware of the tax implications and capital gains –before finalising dates.
You may also opt to ensure that all funds remain in the SMSF during negotiations by flagging the account so that no assets may be sold or money withdrawn until the financial split is signed and sealed. It’s not uncommon for one spouse to want to bail out of the SMSF once you have agreed to the numbers, but this may mean liquidating some assets in the fund to finalise the settlement.
Possibilities: Can you access your SMSF now for a tax break?
If you have already reached retirement age and can access your SMSF funds, you will have more flexibility in managing the account. However, if you are still working, you will likely have to pay Capital Gains Taxes (CGT) if you choose to sell any fund assets in order to pay off an ex-partner. In this instance, you may have to pay a sizable percentage of the gain, but if you’ve held the asset for more than a year, your payable CGT may be lower.
You can agree to delay any sale of SMSF assets until you can move the money into the retirement phase, thereby giving yourself a more significant tax break. This may not seem practical if you are years away from retirement, so talk with your accountant to ensure you are making the smartest long-term decisions.
The Most Important Takeaway
There’s no reason you should go it alone when you are navigating the intricacies of divorce and property settlement, especially with a SMSF in the mix. Contact us for more information on managing your SMSF, or to schedule an obligation-free appointment.
*Please note that this article is based on general guidance and does not consider your individual circumstances. If you are faced with the circumstances of divorce, ensure your financial affairs are being well managed and get the right advice – both legal and financial.
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