Couple de-coupling, and specific complications for SMSFs

There is a unique problem with self-managed superannuation funds (SMSFs) when it comes to marriage breakdown and splitting assets upon divorce, and it is a problem that could become more common.

First, some salient facts to consider. Most of the 539,375 SMSFs in Australia are two-person funds (69.5% of them, according to the latest Tax Office statistical report). And of the 1,023,964 SMSF trustees in the country, many are husband and wife.

As many would already know, the SMSF sector now accounts for about a third of the nation’s total superannuation savings. Now if you consider the on-going growth of SMSFs, and couple that with the latest estimate from the Australian Bureau of Statistics that about one in three marriages end in divorce, it is clear that the complication arising from splitting assets of an SMSF upon marriage breakdown is a problem that will become more common.

So what are these SMSF-specific complications? Consider for example an SMSF that has as its primary asset business premises that are used by a family business — which is not an uncommon situation.  It is easily conceivable that realising the value from such an asset, so that it can be divided between the divorcing couple, may only be achieved through selling the business premises.

Not only is it possible that the family business may not be able to afford to purchase the property from the fund, but one or other of the divorcing couple will in all likelihood not want to continue to be involved in the business.

Unlike other superannuation funds, where members and trustees are separate individuals, SMSF members (even those whose relationship is strained at the very least, or worse) will be required to deal with each other as each is also a trustee. This can add further strain on relations as many tasks, such as preparing tax returns and financial statements, making investment decisions and signing cheques, can require both trustee signatures.

As the Tax Office clearly states, in such a situation “you must continue to act in accordance with the super laws and the trust deed of your fund”. The SMSF regulator says that despite the difficulties that you may have with an individual on a personal level, “as a trustee you must continue to act in the best interests of all members at all times”.

The Tax Office specifically states that SMSF trustees, upon risk of the fund being deemed non-complying, cannot:

• exclude another trustee from the decision-making process
• ignore requests to redeem assets and roll money over to another regulated complying super fund
• take any action that is not allowed by the Superannuation Industry Supervision (SIS) Act 1993 or the SMSF’s trust deed.

So clearly a “de-coupling” on a personal level does not wash away one’s duties as a trustee, although this situation couldbe less of an issue if the trust deed is set up using a corporate trustee.

There are of course many other assets that SMSFs can hold, and before settlement can be agreed upon, or ordered by a court, these assets will need to be valued. For the scenario mentioned above, where business premises comprise the major asset of the SMSF, unless there are enough liquid assets available to allow the SMSF to cover the divorcing spouse’s share of that value, the business premises may need to be sold.

A possible way out of this difficulty would be available if the premises had been acquired under a unit trust structure. An SMSF corporate trustee could then redeem units for cash (to cover the divorcing spouse’s payout), and take up a limited recourse borrowing arrangement to acquire a beneficial interest in the same business premises. Of course this solution would only be available if the SMSF were set up initially with a corporate trustee and had an investment strategy that made use of unit trust structures.

Where the divided share of SMSF assets from a divorce are rolled over into a new fund, care needs to be taken that these are not sold for cash first and then the cash proceeds transferred to the new fund. Assets transferred in-specie are not subject to CGT and the original cost base is retained in the new fund, but these concessions are lost if a cash value is realised before rolling over.

And while on the subject of in-specie assets, while in usual circumstances the rules disallow the acquisition of assets from related parties, the legislation has been amended to allow this as a result of marriage breakdown. This broadening of the scope for such transactions applies to assets acquired on or after November 17, 2010.

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