April 23, 2015

How to protect your SMSF during a divorce

Based on the Australian Taxation Office’s Self Managed Super Fund (“SMSF”) Statistical Survey – March 2014 there were 528,701 SMSF with 1,006,975 members and total assets of over $558 billion. Based on these numbers, the average SMSF has close to 2 members. It does not require an enormous leap in logic to say that the members of these funds are typically Mums and Dads. The average balance of net assets in these funds is a little over $1 million, so it is fair to say that the assets tied up in these funds constitute a very significant asset to most families.

In recent years legislation has been enacted that allows the trustees of a SMSF to borrow on a limited-recourse basis to acquire assets such as commercial or residential property, shares and other investments. This may give the fund a degree of flexibility, however, it can produce issues in a divorce situation. When a husband and wife decide to go their separate ways their assets, once valued, are divided up based on either their own agreement or a decision from the court.

Case Example

By way of an example let’s assume a SMSF owns a residential property which it rents out to non-related parties for market-based rent. The property is currently valued at $600,000 and was purchased by an instalment trust for the benefit of the SMSF with cash held by the fund and a limited recourse bank loan. The current balance of the limited recourse loan is $250,000. The former matrimonial home is valued at $1,000,000 and is unencumbered; in addition there are other non-superannuation related assets of $500,000.

The pool of matrimonial assets excluding the superannuation assets is $1.5 million and assuming a 50-50 split, if the husband borrows $250,000 using equity in the home that he will retain to pay to the wife who is retaining the other non-superannuation assets. The net assets of the SMSF after deducting the balance owing on the limited recourse loan is $350,000.

What are your options?

In terms of splitting their superannuation interests a number of options are available to the separating couple. Firstly, they can both continue as members of the fund with their individual interest being held in separate accounts within the fund. While this may seem an easy option it will require a degree of trust and cooperation between the former spouses which is not always the case.

Secondly, the asset may be sold and the funds used to repay the limited recourse loan and pay out either one or both of the member’s interests into a new fund. This also has its problems in that it may not be an appropriate time to sell the asset or there is a deep desire by one of the parties to retain the property within the fund.

A third option would be for one of the parties to seek an external investor to contribute to the fund so that it could payout the exiting spouse’s interest.

Depending on the spouses individual circumstances it may be a tax effective option for one spouse to make a non-concessional contribution into the fund to be used to pay out the other spouse.

SV Partners are conscious that disputes arising from family breakdown can often be difficult to navigate, so it is important for us to provide advice that is properly considered and supported by facts to deliver realistic expectations. Our expert forensic team can provide specialist advice in property settlements and achieve the best outcome for all parties involved. For more information on our forensic accounting services, please  call on 1800 246 801.

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