Deciding in advance who will stay and who will go in a self-managed superannuation fund (SMSF) is the first consideration for advisers and members when there is a divorce or relationship breakdown, according to Heffron Consulting.
With the COVID-19 pandemic accelerating divorce rates, Heffron said SMSF decisions needed to be discussed and decided while the superannuation agreement or court orders were still being prepared to help achieve what the clients actually wanted.
Heffron managing director, Meg Heffron, said the first step was to decide whether both parties remained in the SMSF or if one party was to leave.
“It might make more sense, for example, to leave one party with more of the couple’s superannuation (and adjust the treatment of other assets to reflect this) if it allows that member to keep a particular asset entirely,” she said.
“The key when it comes to SMSFs is to look beyond simply the value of the member’s balance and consider how the assets themselves should be divided. It is crucial to think about this at the time the relevant agreements or orders are being settled rather than later.”
The next step was to update members’ account balances and understand the capital gains tax position.
“It is also vital to understand and allow for capital gains tax that will be paid either immediately (because the assets have been sold) or in the future (because they have been transferred to a new fund and the leaving member is entitled to special relief on CGT that applies under these circumstances),” she said.
“Many couples value the special relief as it means they don’t need to pay tax on the gains built up so far until the asset is actually sold for cash. But remember, these assets will be sold eventually. At that point, whichever fund owns them at the time will have to pay CGT on both the gains achieved in the new fund and the gains built up before the transfer.”
Heffron noted that the trap that was easily fallen into was that many funds in pensions in place before a rule change in 2017 had special CGT amounts linked to gains built up before 30 June, 2017.
The third step was to think about tax and preservation components and not just the amount of the split.
“If the two members have very different tax or preservation components, it might actually make more sense to have two splits – one each way – to allow them to end up in identical positions,” Heffron said.
“Secondly, think carefully about how to handle cases where the member spouse has multiple superannuation interests. If the tax or preservation components of the different interests vary considerably, it may be worthwhile specifying the interest from which the split is to be paid as well as the amount or proportion.”
The last step was to get documentation right as documentation did not end with the court order or super agreement. There was vital documentation to be prepared by the SMSF itself such as specific information that must be included and deadlines.