SMSF members who split can’t convert assets to cash

Self-managed superannuation fund (SMSF) members who are looking to split assets due to a divorce will not be allowed to convert their fund into a cash asset, according to Townsend Business and Corporate Lawyers.

The law firm said this was a common misconception and unless members had reached retirement or preservation age, any interest within the fund must not be paid out to a member, or any other individual.

The splitting order would depend on the type of super interest and whether it was in the growth phase or the payment phase.

Examples, it said, included:

1. An order for a member to roll-over their interests into another fund (which also means the member leaving the SMSF);
2. An order for a member to pay a percentage or dollar amount of their pension to the other member; or
3. An order that one of the members give their superannuation interest in the fund to the other member.

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Townsend warned that some super interests could not be split such as:

1. Contributions you make with a personal injury election;
2. Transfers from foreign funds;
3. Government co-contributions; and
4. Super interest that is subject to another unrelated payment split (previous divorce).

Another myth Townsend said were that it was incorrect and “dangerous” to believe that the parties could agree on what should happen to the super fund and simply sign resolutions giving effect to that agreement.

“The conversion of a member’s entitlements under a super split can only be undertaken pursuant to the provisions of Part 7A.2 of the Superannuation Industry (Supervision) Regulations 1994 which are lengthy and can be difficult to comprehend,” it said.

“Splitting couples should therefore always seek independent legal advice on how to give effect to super splitting orders and on the options for reinvesting their respective interests into another fund whilst ensuring that any action taken remains compliant within the law.”

Townsend noted that a failure to comply with regulations would likely cause material adverse tax consequences for the members and the fund.

“It is also imperative to remember that contribution splitting in accordance with a Family Court Order has no effect in reducing the amount counted towards the annual concessional contributions cap,” the law firm said.

“Contributions which fall outside the Australian Taxation Office’s contributions cap may result in extra tax.”