Assessing non-compliance a critical step with super splitting

“So there’s a fund and there’s a split that’s going to happen but when you start digging you see that there's regulation details withheld on Superfund Look Up. That’s a very strong hint that the fund is behind on lodgment,” Mr Fettes.

“When you ask the client about the fund’s compliance history you get very hazy answers. They may not be the person that did all the things and they’re not really sure what’s happening. That should be ringing alarm bells if you've got a client in that sort of situation.”

Mr Fettes said there is no recognition of a ‘passive trustee’ in the law which means its critical to get to the bottom of any compliance issues which may undermine the intended outcome of any splitting orders.

“Bear in mind the famous case Shail Superannuation Fund and Commissioner of Taxation [2011] AATA 940, which was effectively about a passive trustee and their former husband who pulled out $3.4 million out of the fund,” warned Mr Fettes.

“While it was clear that it wasn’t really the [wife’s] fault in a strict moral sense, the Tribunal had no truck with that.”

Mr Fettes said this means that from the point of view of the fund being made non-complying, it's a really strict position.

“So getting to the bottom of these things is in the best interest of the client that you’re acting for and also in terms of understanding what is available to be split,” he explained.

“We need to look at whether we’ve got risks of non-compliance, risks of non-arm’s length income, risks of administration penalties or other nasty consequences that is going to undermine the intended outcome of the split.”

Where an SMSF professional has concerns about a particular fund, Mr Fettes said they may want to undertake a compliance review process to really understand the exposure.

“It could be that there's an ATO audit in process or just around the corner. Particularly where funds are hugely behind on their lodgement obligations, it's very difficult to have any confidence about what's going to happen,” he cautioned.

Where there are concerns like this, Mr Fettes said there are things that SMSF professionals might look to address as part of the splitting orders.

“If you're acting in relation to the departing spouse, obviously one of the big points you would want to really think about is what the indemnity clause should be providing. If you've got that spouse exiting the fund, just because they're out of the fund doesn't mean they're not on the hook,” he stated.

Mr Fettes explained that there will still be exposure from having been a trustee during those periods where there were contraventions of super law occurring.

“It's not uncommon to see that. So thinking about indemnity is really important, if you want to get the deal done because otherwise you're wearing more risk in terms of that departing spouse,” he said.

“Even an indemnity is not a perfect solution, but it is something that would be remiss not to consider.”

If there is a departing spouse “leaving behind a dumpster fire of a fund behind” SMSF professionals also need to think about whether this is prudent trustee behaviour, he said. 

“If I'm acting for a departing spouse and there's worries about the fund's compliance position, you really want things in there about how the fund will be re-regularised, how the funds lodgement and audit obligations will be satisfied and potentially if there needs to be a voluntary disclosure made that there will be a voluntary disclosure made, to try and minimise these risks,” he stated.

“You don't want to be in a situation where you've just left the disaster zone behind and you're just hoping for the best. That's not gonna get you very far. If the ATO does an audit of that fund, you’re not going to come off smelling like roses.”