When you’re separating from your partner, property settlement is one of the most complex parts of the process. Having superannuation in a self-managed super fund (SMSF) can make things even more complicated.
Normally, splitting superannuation means having the trustee of one partner’s fund (the one whose super is being split) transfer the other partner’s super interest to a new fund. But what happens if you’re both in the same SMSF – and you want to stay there?
In this article, we’ll explore how superannuation is normally split, how super in SMSFs is split, and why you might want to consider staying in the same self-managed super fund as your ex-partner.
How Superannuation Is Normally Split During Separation
When a married or de facto couple separates, both parties are entitled to a share of the relationship’s property. This property is divided between them based on the Family Law Act 1975 (Cth) and any financial agreements.
The couple’s superannuation is counted as property – but isn’t divided in the same way as other property. Because superannuation is held in a trust, it’s instead regulated by s 90 of the Act and the Family Law (Superannuation) Regulations 2001 (Cth) (with the exception of Western Australia). Under that legislation, couples can either split their superannuation with a superannuation agreement (a type of financial agreement specifically for super) or by order of the Federal Circuit and Family Court of Australia.
Unless you and your ex-partner make a superannuation agreement (either yourselves or with the help of family lawyers), the Court will equalise your super interests by either:
- ordering your ex-partner’s fund trustee to split their superannuation and make a payment to your fund; or
- ordering your fund trustee to do the same for your ex-partner.
There are different ways to value and split your super, but, basically, the Court will aim to fairly and equitably divide your superannuation interests
How Superannuation in SMSFs Is Split During Separation
Splitting superannuation becomes more complex when you and your ex-partner are in a self-managed super fund (SMSF). SMSFs are regulated by their individual deeds and applicable trust law, which supersede superannuation legislation.
Unlike retail or industry funds, SMSFs often invest in varied asset classes, like property, collectables, and commodities. This makes splitting super harder – you may need to involve a professional valuer to determine the assets’ current market value.
SMSFs are also often set up as tax-efficient investment vehicles, which are normally only competitive with other fund types if they contain at least $200,000 in super. If you’re happy with the investment performance of your SMSF, or if splitting your super would make the SMSF non-competitive, you and your ex-partner might not want to split your super.
Here’s how staying together works. If you and your ex are both members of the SMSF, you both have your own separate member accounts. This means that you can both stay within the SMSF even if you’re subject to a splitting order – rather than, say, moving to a retail or industry fund or starting a new SMSF, the superannuation interest will be divided equally between you and your ex’s member accounts.
If one of you is a fund member and one isn’t and you both want to stay in the SMSF, the non-fund member may be able to create a new interest in the fund (depending on the SMSF deed).
Sometimes, you or your ex may be able to receive your benefits as a lump sum payment. You can only do this for unrestricted non-preserved benefits (benefits that don’t currently have a condition of release and may be paid on demand by the member).
The Benefits of Staying in the Same SMSF When Separated
There are plenty of reasons to move out of an SMSF if you separate from your partner: staying can be emotionally awkward, discharging trustee duties might become more difficult, and there may be estate planning implications.
So, against those reasons, why would you want to stay in an SMSF with your ex? There are four main rationales.
Staying in a Strongly Performing Vehicle
The most obvious reason to stay in an SMSF is if you think it’s delivering better value than a retail or industry fund.
Although SMSFs, on average, struggle to outperform other super fund types, you might have confidence in you/your ex’s financial acumen. Keep in mind that past performance is never a guarantee of future performance – just because your fund has performed well over the last few years doesn’t mean it will do the same during slowdowns or recessions.
Keeping the SMSF Viable
You may also want to keep your SMSF competitive by keeping the total fund value as high as possible. Unlike other fund types, which typically charge management fees on a percentage basis, SMSFs are managed at a flat rate, which makes them more cost-effective as they increase in value.
If your investment strategy depends on having an SMSF, it may make sense to stay in the same fund as your partner, rather than setting up a new fund that is less competitive.
Maintaining Business Assets
If your SMSF holds assets used in a business owned by you and/or your ex, moving out of the fund might mean that, in order to split the super value, those business assets have to be sold. This can have a range of undesirable effects – from impacted business performance to tax implications – and it may be better for you and your ex to simply stay in the SMSF together.
Minimising Exit Costs
Finally, there may be costs associated with splitting the SMSF’s assets that might make leaving more trouble than it’s worth. For example, if you have complex asset structures in the SMSF, there may be extensive legal and accounting costs involved in order to divide the value equitably. Tax considerations also need to be taken into account – selling an asset owned by the SMSF could incur capital gains tax, impacting the overall value of the fund.
Splitting superannuation during a separation is incredibly complicated. There is a multitude of tax and estate planning considerations that your lawyers will need to account for. When SMSFs are involved – with their deed-specific governance and unusual asset mixes – a separation can become even more complex.
For some couples, staying in the same SMSF might make more sense than taking a lump sum payout or transferring to a new fund.
- You might have confidence in the SMSF’s performance.
- You might want to keep the SMSF competitive for investment purposes.
- You might want to maintain business assets.
- You might want to minimise costs associated with leaving.
Of course, the decision to keep your super interest in the same SMSF as your ex-partner should be carefully considered, and made in consultation with an experienced family lawyer and other relevant professionals. Certain funds may not permit new interests to be created, and the estate planning effects of split payouts also need to be examined.
So, if you’re separating with super in an SMSF, start by consulting a family law practitioner. They’ll be able to offer advice appropriate to your situation – and, most importantly, they’ll help you protect your future.