As Neil Sedaka crooned “Breaking up is hard to do”. But it is doubly hard if you are both members of an SMSF!
In an SMSF, the individuals that “own” the fund have the dual role of trustee and member. This gives rise to problems that are unique to SMSFs. The individuals must separate their roles as trustee from their entitlements as members. When a married or de facto couple are in the process of separating, it is even more critical that the member/trustee demarcation is clear.
The member entitlements will often be disparate. The fund may be difficult to split if there are non liquid assets such as real estate that needs to be sold before a split can occur. Clever engineering may be required.
But there can be tax benefits that flow from the splitting of superannuation, including CGT rollover relief. The ATO may well conduct an audit to ensure that the splitting of the superannuation fund was for a genuine separation and that the splitting was not contrived to reap the tax benefits.
To ensure that the SMSF is audit proof, all trustee decisions should be documented. There are notices that the party receiving the superannuation (called the non-member under the Family Law Act, even though they might have their own member entitlement) is required to provide the trustee after a splitting order or agreement. The trustee is also required to give notices to both the member and non-member. Even though the parties are the trustees, the notices should be given and documentation of this action should also be prepared. This will ensure that the law was strictly observed and that the splitting of the superannuation was genuine.
If one of the parties remained or became a member of the SMSF it would make the management of the SMSF quite a challenge! Trustee meetings and decisions could become very strained and it is not a recommended course of action to adopt. Part 7A of the Superannuation Industry (Supervision) Regulations therefore provides that the member can insist that the leaving mmember rollover their entitlement. It is important to remember though that until a splitting order has been made and you have rolled out your entitlement you cannot wash your hands of your obligations as a trustee.
During the separation process, it is important to remember that the SMSF may be audited by the ATO and that proper documentation should be in place to reflect the settlement that the parties have reached in relation to the SMSF.
When you are going through a separation the last thing you need is to be in the firing line of the ATO!