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Divorce on the horizon?

Aside from the emotional turmoil that a divorce brings to a family situation, there are an enormous range of financial issues to be worked through.  Here we breakdown the key issues from an SMSF perspective:

1. Despite the extent of breakdown in the marriage, the law is very explicit about the expectations of all Trustees to continue to “act in the best interests of all members at all times”.  Specifically it spells out that Trustees cannot:

  • 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 the Superannuation Industry Supervision (SIS) Act 1993 or the SMSF’s trust deed.

2. A recent case highlighted the ongoing compliance responsibilities that any Trustee continues to carry, particularly if established as individual trustees, despite a marriage breakdown.  When the Shail’s divorced, Mr Shail withdrew $3.46m of the SMSF assets and took off overseas.  Despite appealing the original decision, it was upheld that Mrs Shail was jointly responsible for the missing assets, with the ATO issuing a penalty for non-compliance of nearly $1.5m and a devastating tax bill to boot of over $1.5m, both of which the individuals, not the super fund itself, were liable for!  (Check out a recent blog for more about the new ATO penalty regime.)

3. When it comes to the divvying up of financial assets, you need to consider all of the assets before applying any super splitting, taking into account any tax or access implications.  Often lawyers and advisers can overlook the ages and personal situations of each of the members, missing opportunities to provide earlier access to an older member, or consider the future contribution opportunities of a younger member, for example.

4. Payment flags can be applied to unlisted assets until they have been properly valued, preventing those assets from being liquidated before agreement has been met.

5.If an asset needs to be sold down in order to split the superannuation (in the case of property for example), consider whether it is possible or feasible for the super fund to borrow money (either from a related party or bank) to meet the cash requirements.  This would only be possible however if the asset was originally set up to be held within a unit trust which was owned by the super fund.

6. If the fund has not initially been set up with a Corporate Trustee and the split leaves a single member running the Fund, a new Trustee will need to be added or a new Corporate Trustee put in place.  This isn’t a costly exercise, but it will require all assets to be transferred to the new name.

7. Liquidating assets to then “rollover” to another fund will create a Capital Gains Tax event that the Fund will need to pay before the proceeds can be rolled over.  In the case of divorce, CGT rollover relief is available where assets can be transferred to another SMSF set up by the exiting member.  In this case, the new fund takes on the original cost base of the asset.

Extreme care in the strategy and record keeping needs to be taken to avoid costly mistakes, which is often challenging when communication breakdowns occur.  Make sure a trusted source of advice is guiding you every step of the way.  Better yet, avoid it completely if you can!

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