Separating but staying in the same SMSF

You have decided to separate from your partner. Does that mean you also need to separate your superannuation?

You have decided to separate from your partner. Does that mean you also need to separate your superannuation?

Not necessarily.

Some separating couples choose to remain members of the same self-managed superannuation fund (SMSF), even after finalising their family law property settlement.

At first glance, that might seem unusual. After all, one of the objectives of a property settlement is generally to disentangle your financial affairs.

But there can be practical reasons for remaining in the same SMSF. The more important question is whether those reasons outweigh the risks of continuing to manage your retirement savings with your former partner.

Why would separated couples stay in the same SMSF?

There are a few common reasons.

1. The fund has performed well

One spouse may have taken primary responsibility for managing the SMSF during the relationship and achieved good investment returns.

The other spouse — sometimes described as the “sleeper spouse” — may be comfortable with that arrangement continuing.

There may also be cost advantages in keeping a larger fund together. Some of the costs associated with running an SMSF, including accounting, administration and audit costs, do not necessarily increase in proportion to the value of the fund.

But past performance is not, by itself, a good reason to remain financially tied to your former partner.

The person who managed the fund during the relationship may not always produce the same investment results. Equally, an industry or retail superannuation fund may offer competitive investment performance without requiring you to jointly manage a fund with your former spouse.

2. Neither person wants to establish another SMSF

Establishing and operating an SMSF involves work and responsibility.

For somebody who played little role in managing the fund during the relationship, the prospect of suddenly establishing and managing their own SMSF may be unattractive.

Moving into an industry or retail fund may be an alternative. But some people prefer the investment flexibility or existing structure of their SMSF.

That can make remaining in the existing fund seem like the simplest option.

3. The SMSF owns assets that are difficult to divide

Sometimes the real problem is the underlying investments.

For example, an SMSF may own:

·       commercial property used by one party's business;

·       an investment property;

·       shares in an unlisted company; or

·       other assets that cannot readily be divided or sold.

If most of the fund's value is tied up in a single illiquid asset, immediately separating the parties' superannuation interests may require the asset to be sold or refinanced.

Remaining in the same fund can sometimes provide breathing room.

But convenience today should be weighed against the potential difficulty of separating the fund several years later.

Remember: you are both still responsible for the fund

This is particularly important for the spouse who did not traditionally manage the SMSF.

Being the “sleeper spouse” does not remove your responsibilities as a trustee.

Generally, each member of an SMSF must also be a trustee, or a director of its corporate trustee. Trustees and directors are responsible for complying with the fund's trust deed and superannuation law.

You cannot simply say, “my former spouse looked after all of that”.

The ATO makes clear that trustees and directors remain responsible for the operation of their SMSF.

If you decide to remain in the same fund after separation, both parties therefore need to understand how it operates.

What happens when you no longer agree?

This is probably the most important practical question.

During a relationship, couples regularly divide responsibilities. One person may manage the investments while the other takes little interest in them.

Separation changes that dynamic.

Questions which previously caused little difficulty can become contentious:

·       Should the fund sell a property?

·       Should it retain cash or invest it?

·       How much investment risk should the fund take?

·       Should the fund borrow?

·       What happens if one person wants to retire before the other?

·       What happens if one person wants to leave the fund?

·       What happens when either person repartneres?

·       Who controls the corporate trustee?

·       How is a deadlock resolved?

An arrangement which works while both parties agree can become very difficult when they do not.

Your trust deed and corporate structure should therefore be reviewed before you decide to remain together in the fund.

Your investment goals may also change

A separation may mean that two people who previously had broadly common financial objectives suddenly have very different ones.

One person may be approaching retirement and want a conservative investment strategy.

The other may have another 15 or 20 years in the workforce and prefer growth assets and greater risk.

That matters because an SMSF must have an investment strategy which takes into account matters including the circumstances of its members, investment risk, diversification and liquidity. The strategy should also be regularly reviewed.

Remaining in the same SMSF therefore requires more than simply agreeing not to divide it.

The fund must continue to make sense for both members.

If you stay together, have an exit plan

If there is one issue that should be addressed at the beginning, it is how the arrangement will end.

Do not wait until there is a dispute.

Consider:

1.     Can either member require their interest to be rolled out?

2.     What notice must they give?

3.     What happens if the fund does not have enough cash to pay or roll over that interest?

4.     Can assets be transferred rather than sold?

5.     What happens if a significant asset must be sold?

6.     Who bears the transaction costs and tax consequences?

7.     How will assets be valued?

8.     What happens if the parties cannot agree?

9.     What happens if one member dies or loses capacity?

An exit strategy is especially important where the SMSF owns property or another asset which cannot easily be converted into cash.

The ATO itself recommends that SMSF trustees prepare and regularly review an exit plan, particularly to deal with circumstances where the unexpected occurs.

What should you check before agreeing to remain in the SMSF?

Before deciding to remain in the same SMSF with your former partner, we suggest considering at least the following:

1.     Compliance — Are the fund's accounts, tax returns and regulatory obligations up to date?

2.     Audit — Has the fund been independently audited each year? SMSFs are required to have their financial statements and compliance audited annually by an approved SMSF auditor.

3.     Valuations — Are the fund's assets recorded at appropriate market values, particularly any real property or unlisted investments?

4.     Trust deed — Is the deed current and does it adequately deal with the way the fund will operate after separation?

5.     Investment strategy — Does the existing strategy still reflect the circumstances and objectives of both members?

6.     Control — Who are the trustees or directors of the corporate trustee and how are decisions made?

7.     Liquidity — Could the fund actually finance a member's exit without selling a major asset?

8.     Exit strategy — Is there a practical process for separating the parties' interests later?

These issues should be considered with your family lawyer, accountant and, where appropriate, a financial adviser or specialist superannuation lawyer.

Should you stay in the same SMSF after separation?

For many separating couples, the cleaner solution will be to separate their superannuation interests and move forward independently.

But that does not mean remaining in the same SMSF is always inappropriate.

There may be sound commercial reasons for doing so, particularly where the fund holds substantial or illiquid assets and both parties understand what continuing together involves.

The important thing is not to stay in the same SMSF simply because it is easier than dealing with the issue now.

If you are going to remain financially connected to your former partner for years after your relationship has ended, the arrangement should be deliberate, properly documented and supported by a realistic exit strategy.

By Oliver Lacey

With special thanks to Stephen Bourke, Director of SuperSplitting, for his expert superannuation insights and contribution to this article.

Stephen is the former head of the Family Law Division of the Commonwealth Attorney-General's Department and was a project leader for the legislative amendments dealing with superannuation and family law. He is the author of SuperSplitting for Family Lawyers and regularly provides expert and technical advice in complex superannuation matters.