It is becoming more common these days for couples to have invested their retirement savings in self-managed superannuation funds (SMSFs). This can be problematic if the relationship breaks down and it becomes necessary to work out how to divide the money in the fund.

Superannuation is treated by the Family Law as just another type of property. However, even though separating couples are able to split their superannuation and divide its value, this does not convert it into cash that can be freely disposed of. It retains its status as superannuation and remains subject to superannuation laws, which generally require it to be reinvested in another superannuation fund until retirement age is reached.

Many SMSFs have only two members who are also the trustees of the fund, and in the context of Family Law, this usually means the two parties to the relationship that has broken down. This can cause difficulties when it comes to valuing the fund. Under Regulation 22 of the Family Law (Superannuation) Regulations 2001 there is no standard system for valuing a SMSF. This is because SMSFs and their assets can be so diverse it is impossible to have a one-size-fits-all approach. For this reason it is important to ensure that a current market valuation of the SMSF assets is. Ideally, this will be done by an independent expert valuer who is jointly appointed by the parties. Where the parties cannot agree on a method of valuation, the Court may appoint whatever method it decides is most appropriate. If the SMSF is already paying a pension, it is the underlying assets of the fund which are valued, not the pension itself. Consideration must be given to the timing of the valuation in relation to the actual division of the assets, particularly if the assets are likely to experience significant fluctuation in value. Any reserves must also be included in the valuation, or distributed to the members before the SMSF is split.

If both parties agree to liquidate all assets and close the SMSF in order to each transfer their super to commercial superannuation funds, CGT is borne by the SMSF before the funds are split. If one party wishes to retain the SMSF, for CGT purposes the parties are classified as either an active participant (the party receiving assets as a result of the split) or a passive recipient (the party giving the split and retaining the SMSF.) The active participant will enjoy rollover relief in respect of the CGT assets obtained from the split. The passive recipient will not. Since it is not possible for a SMSF to only have one member who is also the trustee, the splitting of a SMSF will generally require the fund to be restructured, such as by bringing in a corporate trustee. This restructuring may give rise to a Capital Gains Tax (CGT) event for which there is no relief. This may be avoided by having the passive recipient transfer his or her share to him or herself in the Court orders, thus ensuring they also classify as an active participant and qualify for rollover relief.

If the departing party does not intend to establish their own SMSF, then the assets will need to be converted to cash, as commercial superannuation funds will only accept cash transfers. If there are significant costs involved in liquidating the assets, the parties will need to consider how those costs will be divided.

Further complications may arise if it is found that the SMSF does not comply or has not previously complied with the superannuation regulations, whether through deliberate or accidental non-compliance. It is essential to ensure that the most up-to-date version of the trust deed is provided, and to confirm the identity of the SMSF by reference to its ABN. Using the government-run ABN lookup service will disclose whether or not a fund is currently in compliance with the regulations. The possibility of adverse taxation consequences following an audit is often addressed by the party retaining the fund – who has usually undertaken the bulk of administrative supervision in the past - supplying an indemnity to the departing party. This indemnity may be either without a time limit, or effective from the date on which the departing party left the SMSF.

There are numerous provisions in the Superannuation Industry (Supervision) Act which set out the rules that must be obeyed when splitting a SMSF. Although the trustees are technically responsible for ensuring compliance, in most cases this duty is delegated to the accountant administering the fund. The tightly regulated requirements for administering the splitting of a SMSF are very time consuming and complicated. Around 90 days is usual for the split of an average SMSF. If an administrator is not experienced in making SMSF splits or if a more complex split is required, delays should be expected and allowed for in the Court orders. It is also important to ensure that the administrator understands the consequences arising from non-compliance with the time limits specified in the orders.

In order to successfully split a SMSF it is important to obtain expert legal advice from lawyers who are experienced at communicating and coordinating matters with accountants and financial advisers. Please do not hesitate to contact us if we can assist you with your Family Law property settlement, including splitting your SMSF.