If you have a self-managed super fund (SMSF), it’s important to understand the impact a relationship breakdown can have on your assets. Superannuation assets are considered to be property under the provisions of the Family Law Act, but they are treated differently from other assets.
SMSF and divorce
Unlike most other types of assets, super assets must be held in a trust. Your SMSF is a trust. You cannot access your super until you reach your preservation age and/or you satisfy a condition of release (such as retiring from the workforce, beginning a transition to retirement pension, reaching the age of 65, or being diagnosed with a terminal illness). The preservation age in Australia is between 55 and 60, depending on your date of birth.
Self-managed super funds and divorce: However, in the event of a relationship breakdown with your spouse, super can be divided upon divorce or at a specified time in the future, even if it cannot be accessed until a future date. It can also be divided either now or at a future date if you cease a de facto arrangement (where you were living together on a genuine domestic basis).
Super splitting
Splitting your super involves making a binding financial agreement with your spouse or partner once you decide to divorce or separate. For a financial agreement to be binding, both parties must have:
- – obtained independent legal advice, and
- – signed the agreement.
Once a court has made an order for super to be split, the relevant amount can be transferred to the relevant partner either immediately or at a future date. Your partner may be a part of your SMSF or may have their own superannuation fund.
If you and your partner have both been members (and trustees) of your SMSF prior to your split, then you can continue to both be members of the fund afterwards if you wish. Whether this is a good idea or not depends on whether the split is amicable, your financial situation and your personal objectives. Seek professional advice to decide if it would be best for one of you to start a separate super fund.
When the super is split, the total amount is taken into account, regardless of where the superannuation contributions came from. Whether the funds were personal contributions (unconcessional or concessional contributions), employer contributions or something else doesn’t make a difference.
Flagging super
A court can make a flagging order that no super payment can be made to either partner while a super splitting arrangement is being finalised. They can also make a flagging arrangement in the case of defined future benefit arrangements where the amount of the benefit is currently unknown.
A flagging agreement can only be lifted by the court order or until a flag lifting agreement has been signed by both parties.
Tax implications of super split transfers
Super balances have two components: taxable and tax-free components. Super that is split as the result of a relationship breakdown must retain its pre-split designation.
For example, if you have a court order to split $200,000 of your super with your spouse and 60% of your current balance is a taxable component and 40% is not, then this 60/40 ratio must be maintained when the $200,000 is transferred.
The bottom line
It’s important to seek personal financial advice if you have a relationship breakdown. The advice should include an analysis of all of your assets, including your SMSF arrangements.
If you would like to learn more about how separating impacts your super, please reach out and we can put you in touch with an adviser from our professional network.
