May 2017 3 Minutes
Financial impact of relationship breakdowns
This article outlines the impact that a relationship breakdown can have on superannuation interests.
When a relationship comes to an end, there are a number of financial issues to consider, including the treatment of superannuation in respect of the division of assets, superannuation beneficiary nominations, and SMSF specific considerations.
SMSFs have their own unique set of challenges in respect of relationship breakdowns. When a relationship breakdown occurs, in the broad majority of cases one member of the couple will ultimately cease to be a member of the SMSF. This poses a range of issues in relation to trustee structure, rolling a member benefit out of the fund and resulting tax implications.
Where separating partners continue to be both trustees and members of the fund, they must work together to continue to run the fund and meet their trustee responsibilities. It may be advantageous for each person to seek independent financial advice to avoid any conflict of interest.
If a two member SMSF has individual trustees, and one member of the couple decides to exit the fund, then an additional individual must be appointed as trustee. The new trustee can be anybody the remaining member feels is suitable however, the new trustee cannot be an employee of the member unless they are related. The assets of the fund must be registered in the names of the new trustees.
Alternatively, the fund can switch from an individual trustee structure to a corporate trustee. Again, assets of the fund must be registered in the name of the new corporate trustee. The fund has six months in which to resolve the trustee structure.
This issue above will not arise in the case where the SMSF is already operated under a corporate trustee structure. Nevertheless, the exiting member will need to resign as director and trustee.
Acquisitions from related parties
SIS imposes a general ban on the acquisition of assets from related parties with a small range of exceptions. In the event of a relationship breakdown, the ban does not apply if assets are transferred from one SMSF to another related SMSF if:
- at the time of acquisition the member and their former spouse are separated
- there is no ‘reasonable likelihood of living together being resumed’
- the acquisition occurs as a direct result of the relationship breakdown, and
- the assets being transferred represent the members own interest in the fund.
Capital Gains Tax
CGT concessions may be available to a separating couple if a superannuation agreement is in place to give effect to a superannuation split. To enable a member benefit to be paid from or rolled over to another fund, a CGT exemption may apply where:
- one member of the couple exits the fund and
- assets are transferred in-specie from the old SMSF to the new SMSF
It is important to note, however, that this exemption applies strictly in relation to the in-specie transfer of assets, and does not apply in a situation where the fund:
- sells an asset and makes a cash payment, or
- sells the asset, which is subsequently re-purchased in the departing member's new fund.
If assets are being sold, consideration should be given to any tax liability that is likely to be sustained when determining the division of assets and the exiting member’s interest.