Protecting your SMSF savings in the event of a divorce

Whilst it is said that around 50% of marriages end in divorce, the actual number is around 1 in 3.

Of course, just because the real number is less than perception, this is nothing to be applauded. The real statistic, perhaps, is the obvious fact that 100% of divorces start with a marriage.

The prospect of a divorce is not something that most people getting married would be contemplating, but for those entering second or subsequent marriages, protecting assets and wealth built up in the past may be a higher consideration. The same considerations should apply for those entering de-facto relationships as well.

When it comes to your super, and if you are in a self-managed super fund (SMSF), things can become more complicated. There are considerations not only about what happens to your super, but also your ongoing membership of the SMSF.

Dealing to your super

Superannuation savings (whether in accumulation or pension) have been regarded as “property” for divorce purposes since late 2002. This means that not only can they be taken into account when valuing combined assets for determining a split upon divorce, but the savings themselves can also be split.

Now, how the split actually occurs may be determined through Family Court proceedings, or could be by agreement between the members of the couple. And obviously it’s possible that you could be on either side of the equation – the one losing some of their super, or the one gaining. So what’s important to know?

Firstly, the amount to be split could be a percentage or an agreed figure, and the split could take effect now, or the split could be flagged to take effect at a future point in time. Flagging may be more likely to occur where the superannuation interest can’t be easily split now, or can’t be valued until some future point in time. A defined benefit pension, which is really only valued when it commences is a good example of where a flag may be used.

Secondly, you can’t choose the components of what is split. For example, if a person’s super comprises $300,000 tax free components and $200,000 taxable components (a 60:40 split), and it is determined that $200,000 will be transferred to a receiving spouse, the $200,000 will be comprised of $120,000 tax free and $80,000 taxable components – retaining the 60:40 ratio. You can’t choose to split / receive all of the tax free or all of the taxable components.

In addition, the split occurs in proportion to the preservation status. Using the example above, if the splitting member had access to all their super (for example being age 65 or older), but the receiving spouse wasn’t yet able to access their own super, when the receiving spouse received the $200,000 they will have access to it, even though it may have remained within the super system.

The SMSF specifics

Life can be a bit more complicated with an SMSF. Whilst your super in an SMSF is dealt with under the same rules outlined above (that apply in other superannuation environments), when it comes to an SMSF, you need to remember that your responsibilities extend beyond just your own account balance.

As a member of an SMSF, you are also a trustee. This means you have ongoing obligations as a trustee and you need to decide if you want to remain in that fund, open a new SMSF, or move to a different super fund.

The answer for this differs for each person, as it can be affected by how amicable (or not) the split is with your former partner, and possibly by the underlying assets. For example, even though you are getting divorced, you could still be on good terms with the other fund members / trustees and therefore happy to remain in the fund. There may also be certain assets in the fund that would need to be sold if you were trying to leave the SMSF and move to another fund, but you could have a view that now is not the right time to liquidate them.

And if there are other members, such as children, involved – which fund should they be in?

Divorce can be difficult at the best of times, and can become more complicated when it comes to the impact on your super. If so inclined, you can put in place a superannuation agreement up-front (before marriage) that details how your super will be split in the event of a future relationship breakdown. Most importantly though, it’s important to get the right advice – legal and financial – if you are going through a relationship breakdown to ensure your financial affairs are being well managed.

Bryan Ashenden is Head of Financial Literacy and Advocacy at BT Financial Group.

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