SMSFs warned on tax traps with divorce and splitting fund assets

“Lawyers and the courts are well versed in dividing up assets, but often it’s understanding the nuances of superannuation and tax law that is key to getting the best possible outcome when an SMSF is involved,” Ms Heffron said.

Ms Heffron explained that divorce or relationship breakdown is one of the few times when it’s possible for one person’s superannuation to be moved or split to someone else.

“Remember, this is only the case if the super is formally split via a superannuation agreement or court orders. A couple can’t just decide this between themselves,” she noted.

“The split can be done immediately or in the future when payments are made from it.”

In terms of SMSFs, Ms Heffron said usually the balance is divided up and the person receiving some of their ex-partner’s super will be able to choose what they do with the amount they receive.

“Subject to any specific requirements of the superannuation agreement or court orders, they can move it to another fund, leave it in the existing SMSF or — if they are at the age where they are already allowed to access their superannuation — they can take it out of super,” she explained.

Ms Heffron said there are some important steps that advisers and their SMSF clients should follow to ensure a smooth process.

The first consideration, she said, is whether both parties will remain in the SMSF or if one party will leave.

“Commonly, someone will leave the fund which inevitably raises the next challenge: deciding how assets within the SMSF will be distributed or sold to create liquidity for a payout,” she said.

“SMSFs with major assets that are not easily divided [such as] property can present difficulties here and prevent the couple from effectively separating their financial affairs.”

It some cases, it may make more sense to leave one party with more of the couple’s superannuation and adjust the treatment of other assets to reflect this, if it allows that member to keep a particular asset entirely.

“The key when it comes to SMSFs is to look beyond simply the value of the member’s balance and consider how the assets themselves should be divided. It is crucial to think about this at the time the relevant agreements or orders are being settled rather than later,” she said.

Once it is agreed which member is staying or going and whether any assets will be sold for cash or or transferred to another fund, Ms Heffron said it is essential to update member balances.

It is also vital to understand and allow for capital gains tax that will be paid either immediately or in the future.

“Many couples value the special relief as it means they don’t need to pay tax on the gains built up so far until the asset is actually sold for cash. But remember, these assets will be sold eventually,” she said.

“At that point, whichever fund owns them at the time will have to pay CGT on both the gains achieved in the new fund and the gains built up before the transfer.”

She also pointed out that funds that had pensions in place before the major rule changes in 2017 may have some special CGT amounts linked to gains built up before June 2017.

“Normally, tax is paid on these amounts when the asset is sold. Unfortunately, this particular tax also has to be paid if the assets are transferred to another fund even as part of a divorce; it can’t be just rolled over to the new fund like other capital gains,” she warned.

“This will be paid by the original fund and should be factored into the relevant calculations.”

SMSF clients, she said, should also think about the tax and preservation components, not just the amount of the split.

The splitting rules, she explained, require that the amount received by the non-member spouse is divided between tax and preservation components in the same proportions as the original interest.

“There are some important factors to consider here. If the two members have very different tax or preservation components, it might actually make more sense to have two splits — one each way — to allow them to end up in identical positions,” she said.

“Secondly, think carefully about how to handle cases where the member spouse has multiple superannuation interests. If the tax or preservation components of the different interests vary considerably, it may be worthwhile specifying the interest from which the split is to be paid as well as the amount or proportion.”

Documentation, she said, is also critically important.

“Unfortunately, this doesn’t end with the court orders or superannuation agreement — there is vital documentation to be prepared by the SMSF itself. As usual with superannuation, there is specific information that must be included and deadlines,” she said.