Superanuation Splitting - It's much more than just an agreement between the parties
So, you’ve just had Family Court Orders finalised, you think you’re almost done, ready to move on… hold on a minute!
Sadly, with one in three marriages in Australia likely to end in divorce, the splitting of interests in a Self-Managed Super Fund raises a number of questions for the future.
Under the Family Law Act, superannuation (whether SMSF or retail super fund) is treated as a form of property. As a consequence, couples seeking property orders from the Family Court are required to give a full disclosure of all their superannuation interests. Only once both parties have presented a disclosure of their SMSF interests, a valuation will be conducted by the courts. This includes a valuation of all assets held in the name of the super fund trustee.
Assets in a Self-Managed Super Fund are often diverse, and there is no standard approach to how to value them.
Usually, an independent/court appointed expert valuer will conduct a review of the fund. Once a valuation has been completed, the court is likely to make a superannuation splitting order. The splitting order will depend on the type of superannuation interest, and whether the fund is in ‘growth phase’ (accumulation) or ‘payment phase’ (pension).
Common examples include:
1. An order for a member to roll-over their interests into another fund (which also means the member leaving the SMSF, which has its own potential implications);
2. An order for a member to pay a percentage /dollar amount of their pension to the other member;
3. An order that one of the members give their superannuation interest in the fund to the other member.
Some superannuation interests cannot be split. These include but are not limited to:
1. Contributions you make with a personal injury election;
2. Transfers from foreign funds;
3. Government co-contributions; and
4. Super interest that is subject to another unrelated payment split (previous divorce).
Generally, Family Court orders regarding superannuation are often not precise on the method for determining super splitting. In any case, any split of SMSF contributions must always be compliant with current superannuation and tax law.
There are a number of common misconceptions about how to split superannuation.
One is the belief that super splitting converts the fund into a cash asset. Unless members have reached retirement or preservation age, any interest in the fund must not be paid out to a member (or any other individual).
Another is that the parties can agree on what should happen to the super, and simply sign resolutions giving effect to that agreement. These notions are incorrect and dangerous.
The conversion of a member’s entitlements under a super split can only be undertaken pursuant to the provisions of Part 7A.2 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Act) which are lengthy and can be difficult to comprehend.
Couples who are splitting up should therefore always seek professional legal advice on how to give effect to super splitting orders, and to consider options for reinvesting their super proceeds into another fund, whilst ensuring that they remain compliant within the law.
A failure to comply with regulations can cause material and adverse tax consequences for members and the fund.
It is also important to remember that contribution splitting - in accordance with a Family Court Order - has no effect in reducing the amount counted towards an individual’s annual concessional contributions cap. Contributions which fall outside the ATO’s contributions cap may result in extra tax.
If you are going through a divorce or super split, give us a call on (08) 7477 8252 to help you work through the complex issues. We have relationships with a number of solicitors, to ensure you are in the best position possible for the future.