What happens to my Self-Managed Superannuation Fund when I separate?
Parties should as far as practicable work towards finalising their financial relationship following separation.
This is often referred to as the ‘clean break principle’, which is reflected in section 81 of the Family Law Act (1975) Cth.
The task of disentangling the interests of separating parties in a Self-managed Superannuation Fund (SMSF) is equally informed by the clean break principle. This can be a simple process, or quite convoluted, depending on matters including the underlying assets belonging to the SMSF and the parties’ conduct in running the SMSF during the relationship and upon separation.
Unfortunately, many people are unaware of the level of responsibility associated with operating an SMSF and the potential downside and risk involved. Despite the obligations associated with being a trustee of an SMSF, in the context of a relationship, it is not unusual to see one member entrust the running of the SMSF to their partner. This can become quite problematic and present various issues in the context of separation and divorce.
In separations involving high conflict, parties are more often likely to behave poorly and engage in behaviour that may result in an offence resulting in one member of the fund becoming a disqualified person for the purposes of the Superannuation Industry (Supervision) Act 1993 (SIS Act). This can leave the remaining members having to figure out what implications are associated with their former partner becoming a disqualified person, all while trying to disentangle themselves financially from their former partner. What can be done in this situation? Firstly, it is important to understand more about disqualification.
What grounds constitute disqualification?
Section 120 of the SIS Act details the grounds for disqualification with respect to individual trustees and corporate trustees:
In relation to an individual, a person is disqualified from being an SMSF trustee if:
- The person has been convicted of an offence against or arising out of a law of the Commonwealth, a State, a Territory or a foreign country, being an offence in respect of dishonest conduct;
- A civil penalty order was made in relation to that person;
- The person becomes “insolvent under administration”- undischarged bankrupt; or
- The Commissioner of Taxation has disqualified that individual.
In relation to corporate trustees, a corporate trustee would be disqualified if:
- A responsible officer (such as a director) becomes a disqualified person;
- A receiver, administrator or provisional liquidator has been appointed; or
- The company has begun to be wound up.
The Australian Taxation Office can also disqualify an individual if it is satisfied that the individual is otherwise not a fit and proper person to be a trustee. Should that occur the Australian Taxation Office will give written notice of the disqualification and publish details of the disqualification in the Australian Government Notices Gazette.
The consequences of disqualification
A disqualified person cannot remain a trustee of an SMSF or a director of a corporate body that is a trustee of an SMSF. If a disqualified person remains a trustee, they will be committing an offence and be liable for penalties or even incarcerated as provided for by section 126K of the SIS Act. The disqualified person can even put the fund at risk with respect to becoming non-compliant, which may result in the fund facing significant tax penalties, possibly causing multiple issues for the remaining members.
Options available in the context of separation and disqualification of an SMSF trustee
Options are available to trustees in circumstances where they or their former partner becomes a disqualified person for the purposes of the SIS Act. It is important to note that a member’s underlying entitlements are not automatically impacted and in fact can be preserved in circumstances where they or their former partner become disqualified. Any action should be taken as soon as possible. Some of the options include:
- Where assets and other entitlements can be separated from the other member’s interests within the 6-months period, a trustee can choose to roll out their superannuation balance into an individual industry or retail superannuation fund and resign as a member and trustee of the fund;
- Where assets and other entitlements cannot be separated from the other member’s interests within the 6-months period, the Australian Prudential Regulatory Authority (APRA) can appoint an acting trustee of the SMSF from the time of expiration of the 6-month period, until the disqualified person can remove themselves and their superannuation balance from the SMSF. By way of example, if real property is held by the SMSF, then certain steps may need to be taken for the property to be sold, which can exceed the 6-month period.
- Members can also elect to wind up the SMSF. However, this can only occur after members complete all the requirements that the trust deed specifies about winding up the fund. Members will also either need to pay out (if meeting a condition of release) or roll over their superannuation and leave a sufficient amount to meet any final tax amounts and other expenses. A SMSF auditor will also need to be appointed to complete the final audit with respect to the fund. Additionally, members will need to complete and lodge the final SMSF annual return.
- With respect to disqualified corporate trustees, the disqualified member must resign as director of the corporate trustee and roll out his or her superannuation balance. The remaining individual can then remain as the sole director and member of the fund.
In the context of a high-conflict separation, it is usually the case that one member refuses to cooperate or disclose certain financial information and documentation to help remedy or cure the consequences of non-compliance and disqualification. Should this occur, the remaining members can seek Court orders with respect to their former partner disclosing all financial information and documentation associated with the SMSF and with respect to engaging an accountancy firm to enable the parties to take the next steps associated with disentangling their interests in the SMSF.
While it is easy to understand why SMSFs remain an attractive long-term investment vehicle for intact families as they may help them to achieve greater control over their asset allocation and provide their members with speed and flexibility with respect to investments, it is clear from the above that it can become quite problematic to address in the context of separation and divorce. This is particularly so when one member becomes a disqualified person for the purposes of the SIS Act and in the context of high-conflict separations. Notwithstanding, there are options available, however, it is prudent to obtain tailored legal advice and to understand your option and the implications of taking certain actions prior to making any changes.
Doolan Wagner Family Lawyers offer specialist family law advice in St Leonards on Sydney’s North Shore. If you have recently separated or have a Family Law enquiry, please contact us on (02) 9437 0010 or send us an email at firstname.lastname@example.org to discuss your matter in complete confidence.
About the Authors:
Lisa Wagner is Principal of Doolan Wagner Family Lawyers. Lisa is an Accredited Family Law specialist and a nationally registered Family Dispute Resolution Practitioner. Lisa has close to 30 years of experience as a specialist family lawyer, experienced litigator and skilful negotiator in all family law matters.
Connect with Lisa on LinkedIn: Lisa Wagner
Sara Arnold is a Family Lawyer at Doolan Wagner. Sara is experienced in a wide range of property and parenting matters, including Hague Convention Applications and Relocation matters. Sara’s background in commercial legal work compliments her practising as a family lawyer and allows her to identify various issues and provide the most practical and cost-effective advice for her clients in respect of settlements involving businesses as well as other financial matters.
Connect with Sara on LinkedIn: Sara Arnold
Disclaimer: These posts are only intended as an overview or comment on current issues that may interest you and are not legal advice. If there are any matters that you would like us to advise you on, then please contact us.