SMSF practitioners should take care when readjusting a client’s balance following a separation to ensure they have followed the SIS obligations for this process.
Where a couple separate and their superannuation balances are effectively required to be adjusted as a result of their financial settlement, care should be taken to review the SIS obligations for adjustments made to member balances.
Although not as common as initially expected, payment splits are undertaken by many couples divorcing as a way of giving effect to their financial asset allocation, and given the court system can sometimes have an uninformed approach to these splits, there are a few key considerations to keep in mind when dealing with a payment split.
1. Part 7A of the Superannuation Industry (Supervision) Regulations 1994 is lengthy and repetitive, which means it isn’t a great read, and is difficult to be sure you are looking at the correct provisions. Care needs to be taken to ensure that the trustee, the adviser and the auditor are reviewing the regulations relevant to the fund being reviewed.
2. It is a common misconception that a split must be accompanied with a court order. In fact, there does not need to be a court order in place to split member balances between spouses. A couple may have an agreement between them to split their superannuation. This is called a split under a superannuation agreement in the regulations.
3. The lingo can be confusing! Even if the husband and the wife are both members of the same SMSF, the member splitting their benefits with their spouse is referred to as the ‘member spouse’, and the member receiving the benefits is referred to as the “non-member spouse”. There can be situations where both members are member and non-member spouses, if there are multiple benefit splits back and forth between each spouse!
4. Where a benefit is to be split, the trustee of the fund must communicate with both the member and non-member spouse (in writing, and have the correspondence dated) within 28 days of receipt of the split agreement or where there is a court order by the later of 28 days after the operative time for the payment split, or 28 days after the trustee receives a copy of the order.
5. There are specific requirements where the benefit being split is paying a pension to the member spouse, and there are requirements in relation to the allocation of benefit characteristics from the member to the non-member spouse’s account.
6. Divorce of course is not necessarily a pleasant event, and hostilities can run high between the divorcing parties. The regulations factor in this reality and there are carve outs for trustees who communicate as required, but receive no response from a non-member spouse regarding their benefits. Where no response is received, the trustee should make note of this to ensure they are documenting the process. A regular approach by many trustees however, is to simply act on the instructions in the court order or split agreement with little regard to the obligations imposed under Part 7A. Many payment splits simply have no correspondence sent between the parties at all.
7. Part 7A is mentioned under regulation 6.17, which means the auditor (who must sign off on compliance with regulation 6.17 in Part B of their audit report) must consider the allocation of benefits between spouse accounts, and whether the trustee has, in all material respects, complied with the requirements imposed by Part 7A. In my office, it is very common to be qualifying on compliance with the requirements as little or no paperwork exists to evidence the obligations of Part 7A has been addressed by the fund trustee.
8. The court cannot over-ride the SIS requirements regarding benefit payments or member entitlements. All aspects of SIS must be complied with, and this includes access to benefits, conditions of release, the sole purpose test and loans or financial assistance to members. In one of our earlier payment split reviews, the court had determined that the wife in the proceedings could receive the residential property held in the husband’s SMSF. There was no condition of release, and as a result, the asset could not simply be accessed by the wife. The residential property should have been transferred to her superannuation fund, after which if she had satisfied a condition of release, the property (assuming the deed permitted an in specie asset transfer) could have been taken as a lump sum benefit payment. To transfer the house into the wife’s name caused endless issues for the fund and the divorcing couple.
So all up, care needs to be taken and trustee obligations need to be addressed in a timely manner otherwise they simply will not be done. This will typically result in the auditor qualifying regulation 6.17 in their audit report, and the fund being reported to the ATO in an auditor contravention report, under the mandatory reporting obligations imposed by the ATO.
Belinda Aisbett, director, SuperSphere
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