What Happens to our SMSF in our Family Law Property Settlement?
When a relationship ends, a number of issues need to be resolved, including the division of property between the parties. Superannuation is a form of property under the Family Law Act in both marriages and de facto relationships. We have seen an increasing number of SMSFs in property settlements in the past 10 years and it is important to understand that an SMSF is a separate legal entity to the parties.
What challenges are faced during a property settlement?
Self-managed super funds (SMSFs) are often more complex than other financial assets, requiring specialised knowledge and careful handling to ensure compliance with legal and financial regulations. This especially the case when an agreement is being drafted that provides for the division of, winding up or rolling out of an SMSF. Common challenges that are faced include:
a. Valuation Issues: to determine the value of an SMSF, lawyers need to request copies of all financial documents relating to the fund because it is important to understand the assets owned by the fund. Does the SMSF own a residential or commercial investment property? Is there a loan attached? Is there money in the bank? Does the fund own shares? What are all of these assets worth?
b. Compliance Issues: It is common that the ‘owners’ (members) of the fund aren’t aware of the strict financial, tax and auditing obligations imposed on them by legislation. Sometimes the lack of compliance comes to light after a relationship breakdown and the fund needs to be made compliant before we can engage in a property settlement.
What options are available?
There are several options available to a separating couple when an SMSF is involved, that include:
a. one party retaining the SMSF and the other party rolling out their interest in the fund. They can roll that interest into another SMSF that they will operate separately or they can roll the interest into an industry super fund, or
b. neither party retaining the SMSF and the parties both rolling out their entitlements to other funds.
Generally, any assets owned by the SMSF are sold, debts paid out and the net proceeds of sale put into the SMSF bank account. In some cases, there is sufficient equity in the SMSF assets for a property to be retained and loans refinanced to remove the party leaving the fund. The SMSF then retains ownership of that property.
But, regardless of how you intend to handle your SMSF after separation, the agreement must be formalised into Consent Orders approved by the Federal Circuit and Family Court of Australia or a Binding Financial Agreement under the Family Law Act.
Our Family Law Team has decades of experience handling complex property settlements, including those involving SMSFs. Call us if you need advice.
