Superannuation has become an important part of family wealth in Australia. Super balances of the husband and wife are counted as marital property and a part of family assets. Superannuation and divorce will impact financial condition on retirement. So if a couple find themselves facing a divorce, the balance in super assets is divided up in Family court. In case of divorce, couples who co-manage their self-managed super fund (SMSF) for efficient tax management or super scheme will be facing a number of issues. SMSF’s were intended to provide a peaceful retirement for couples, but sometimes these funds become a battleground for couples fighting their fair shares of the assets
Divorce can occur for many reasons such as domestic violence or irreconcilable differences. When couples decide to go their separate ways, they need to be aware of what happens to their super entitlements. Here are the frequently asked SMSF Questions & Answers:
What will happen to the fund during divorce?
Managing SMSF rests with the trustees. They have the control over the responsibility of the fund’s investment decisions. Divorce proceedings do not suspend trustee obligation. There is usually a period where both members must make joint decisions as trustees. This can be quite difficult during divorce as tax returns, financial statements, cheques etc. need to be co-signed by both members. Having a specialised accountant to assist each party fulfill their duties during this time will help.
These are the things a trustee cannot do:
• exclude another trustee from the decision-making process
• ignore requests to redeem assets and roll money over to another regulated complying super fund
• take any action that is not allowed by Superannuation Industry (Supervision) Act 1993 (SISA) or the SMSF’s trust deed.
Doing any of these actions will result in SMSF non-compliance and will be subject to tax consequences. You will also be disqualified as a trustee and you cannot run an SMSF in the future.
How can I protect my SMSF during a divorce?
Protect your SMSF by making a flagging agreement. Flagging prevents the trustees from making any payments from the fund. This is very useful if there is some risk your partner may try to withdraw benefits while divorce proceedings or negotiations are taking place or if valuations are uncertain.
What will happen to my super if we separate?
Super balances of husband and wife are considered as property. In divorce it’s possible that you will get some of your ex-partner’s super or he will be entitled to some of yours. In many cases, the court awards half the super to each partner. Like any asset it can be divided between the couples by agreement or court order.
How is splitting superannuation on divorce done?
The Family Law Act 1975 and the Superannuation Industry (Supervision) Act 1993 (SISA) specify how super is treated in divorce. Super fund is held in a trust with rules on when these assets can be accessed. Super is considered as an asset, it can be divided between partners by financial agreement or court order. Financial agreement must be in writing, it can be made before, during or after the marriage. The court will confirm this agreement on how the assets should be split. If no agreement was reached, then the court decides how assets should be divided.
Superannuation Agreement or Court Order?
The couple may be able to use a superannuation agreement to divide super balance in a reasonably amicable separation. Trustees are legally required to implement the split based on the agreement. If the agreement is legally binding or meets the legal requirement the trustees can carry out the agreement and the court doesn’t need to be involved.
If the couple cannot reach an agreement then they can seek an order in the Family Court to determine how the super assets should be divided. Additional documents such as the fund’s trust deed, financial statements and confirmation of complying status should be submitted to the court. SMSF trustees must provide all the necessary documents to the court.
What are the available options once the split has been decided?
Each partner receiving funds will generally have three options after an agreement or court order has been made.
• Create a new interest in your existing fund
• Roll over the benefits to a different super fund
• Withdraw the amount after satisfying the condition of release
Common conditions of release are:
• Retiring after reaching the preservation age or turning 65
• Starting a transition to retirement pension
• Severe financial hardship
Do I need to restructure my SMSF?
You don’t need to restructure your SMSF after the split if you have a corporate trustee but if you’re the only trustee left in the fund, you will either need to appoint a corporate trustee or find another person that will act in the role of individual trustee.
Can my ex-spouse claim any of my super after I die?
If you have a will, it is up to the executor of your estate to decide who gets the cash. Without a death nomination or will the money will be paid to your dependents. Technically your ex-spouse is considered as your super beneficiary and may be eligible to receive some super money if they make a claim.
Divorce can have a lasting impact on your super funds. If you run an SMSF and contemplating divorce, seek expert advice immediately to help sort out your super. Call us, our SMSF specialist will give you holistic advice and make sure you enjoy a comfortable retirement.
Note: This article is for general information only and should not be considered a personal financial advice. Seek personal financial advice before making any financial decision.