There were 49,032 divorces granted in 2017, an increase from 46,604 in 2016, and that's not counting de facto relationship breakdowns (ABS, 2017). What usually follows separation or divorce is the splitting of the couple's assets under a family law property settlement.
Superannuation interests can be quite considerable, particularly for members of self-managed super funds (SMSFs). Since 28 December 2002, superannuation has been considered in family law property settlements under the Family Law Act 1975 (FLA). These settlements are called payment splits. Payment splitting rules apply to the property settlements of former married couples from 28 December 2002 onwards. The rules have applied to de facto couples, including same-sex couples, in all states except South Australia and Western Australia since 1 March 2009. South Australia adopted payment splitting rules from 1 July 2010; however, the rules do not yet apply in Western Australia.
Retail super funds have established processes for dealing with payment splits, but SMSF members, who are also trustees of their SMSFs, might be ill-prepared for dealing with a payment split. An SMSF trustee's obligations under the payment splitting rules are the same as the obligations of a retail fund trustee. Obtaining expert professional advice is therefore essential to guide SMSF trustees through a payment split at what can be an emotional time.
SMSF payment splitting
Trustees should first check the SMSF trust deed for any provisions regarding payment splits. These provisions will apply if they don't conflict with the FLA and superannuation law. If a trust deed is silent or contradictory in relation to payment splits, then the FLA prescribes that the relevant provisions are deemed to be included in the trust deed.
The steps for payment splitting are:
- Obtain information about the member's super
- Decide the splitting method
- Determine the payment split amount and payment method
- Serve agreement or an order on the trustee
- The trustee notifies the parties and receives payment instructions
- The trustee implements the payment split.
Property investment by an SMSF might raise capital gains tax and cash flow issues that can significantly impact SMSF member interests.
Obtaining information about a member's SMSF
In a family law property settlement, the net asset pool of the separating parties must be clearly defined and known by both parties. Before a court orders superannuation to be split, it must determine the value of each member's superannuation interest.
Either or both members can submit a superannuation information request form to the SMSF trustee together with a declaration (Family Court of Australia, Form 6 Declaration) that the information relates to a family law property settlement. If these requirements are met, SMSF trustees must comply with the request. Although SMSF members can obtain the information informally, spouses or partners who are non-members must make formal requests. The FLA specifically prohibits a fund trustee from advising a member that a non-member spouse or partner has made a request for information. However, given that members are also trustees in an SMSF, this can be difficult to achieve. This measure was introduced to protect members or non-member spouses from domestic violence by not revealing their address. To achieve this protection, a non-member spouse who makes a request for information from an SMSF should use email rather than the postal service.
Information to be disclosed in a family law settlement
SMSF trustees must provide the following information about the member's superannuation interest:
How is a splittable interest valued?
- Whether the interest is in accumulation or pension phase
- Whether the interest is unsplittable, which is defined as interests of less than $5,000, or less than $2,000 per year is paid from a non-commutable lifetime or fixed term annuity or pension
- Tax and preservation components
- Any existing payment split or flag that the interest may be subject to
- Any binding nomination in favour of a person other than the party requesting the information
- A copy of the trust deed
- The expected costs to the SMSF for implementing the split
- The date the member joined the fund and their eligible service date.
If both parties are members, and therefore trustees, of the SMSF, it is easy to assume that information about their superannuation is readily available. However, unlike retail super funds, many SMSFs don't have systems that provide daily values for member accounts. To value the superannuation interests of members an accountant usually needs to be engaged.
An accountant will often value a splittable interest based on the following:
- The current market values of the SMSF assets supporting the interest
- Which SMSF assets will be sold or transferred in specie to enable the payment split
- The costs to facilitate a payment split
- The potential capital gains tax (CGT) liability
- Any potential CGT rollover if assets are rolled out of the SMSF in specie (see below for more on CGT implications)
- The method used for adjusting the base amount for market movements.
The after-tax value of property and the costs of disposal to meet a family law property settlement must be carefully considered. Investment properties in an SMSF may raise CGT and cashflow issues that can significantly affect SMSF members' interests. Once an agreement or order is finalised it will be difficult to change the value of the split. Any costs and tax liabilities must be accounted for otherwise the remaining SMSF members may have to bear these liabilities and costs.