Splitting a Self Managed Superannuation Fund (SMSF) under the Family Law Act
When a couple separates, superannuation is an important issue to be taken into consideration. Since the introduction of the Superannuation Guarantee in 1992, the amount of money in superannuation is ever-increasing. When the superannuation is a self managed superannuation fund (SMSF), another layer of complexity is added.
In an SMSF the individuals that “own” the fund have the dual role of trustee and member. The individuals must separate their role as trustee from their entitlement as members. When they are in the process of separating, it is even more critical that the member/trustee demarcation is clear.
While there can be tax benefits that flow from the splitting of superannuation, including CGT rollover relief the ATO may well conduct an audit to ensure that the splitting of the superannuation fund was for a genuine separation and not contrived to reap tax benefits.
To ensure that the SMSF is audit proof, all trustee decisions should be documented. There are notices that the trustee and the parties are required to serve on the fund and each other. Even though the parties are the trustees, the notices should be given and documented. It is surprising how many people don’t comply with this aspect of the rules who may later find themselves in trouble if they are audited.
Part 7A of the Superannuation Industry (Supervision) Regulations provides that the non-member may elect to have a new interest in the fund or to rollover their entitlement to another complying super fund.
If the non-member became a member or remains a member of the SMSF, it would make the management of the SMSF quite a challenge! Trustee meetings and decisions could become very strained and it is not a recommended course of action to adopt. If the parties have just gone through the difficult process of severing their other financial ties, why should they keep this one financial relationship going? Part 7A of the Superannuation Industry (Supervision) Regulations therefore provides that the member of an SMSF can insist that the non-member rollover their entitlement.
We usually recommend that the orders or superannuation agreement include the necessary steps so that one party can exit the SMSF without the risk of incurring further conflict down the road.
As tempting as it may be it does not pay to cut corners when splitting a SMSF. The ATO is ever vigilant!