Where a relationship breakdown has occurred between spouses, the parties’ superannuation entitlements may be subject to a family law property settlement. For ease of expression, we use the term ‘Splitting Orders’ to include a split of superannuation provided for under court orders/minutes of consent, or a superannuation agreement as part of a binding financial agreement.
Many trustees and advisers incorrectly assume that having Splitting Orders in place will broadly conclude a split from a superannuation law and tax perspective. However, this is not the case, as additional steps are required to comply with the superannuation legislation and regulations and to ensure any applicable CGT roll-over relief applies as intended.
This article examines the legal mechanics of properly implementing a superannuation split in an SMSF with a particular focus on what must occur after Splitting Orders have been obtained.
Who are the parties in a split?
As a preliminary matter, it is important to clarify a point on terminology. The superannuation splitting laws refer to the relevant parties as the member spouse (MS) and non-member spouse (NMS) which can potentially be a source of confusion for a layperson.
The key point to remember about this terminology is that the MS is the party whose superannuation interest is subject to a split (ie, they are the party giving up their super in relation to a particular split). In contrast, the member who is the beneficiary of the split is referred to as the NMS.
Though it is often the case that a NMS will depart the fund after the split is carried out, the terminology of ‘non-member’ and ‘member’ is not based on membership status in the SMSF. Indeed, it is quite possible to have a MS departing the fund and a NMS remaining in the fund.
Note also that if there is a split of each member’s interest in the same SMSF, both parties will be a MS in respect of their own interest and NMS in respect of their former spouse’s interest (eg, where a cross split is being implemented).
The usual pathway for a split in an SMSF
As noted above, Splitting Orders must be implemented with regard to additional required steps under the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR). We set out below the major steps that must be implemented once Splitting Orders are in place.
(NB: This article outlines the key steps required in relation to the usual situation for an SMSF which is a split implemented under div 7A.2 of the SISR initiated by the NMS. We do not consider the trustee-initiated pathway in div 7A.1A of the SISR for implementing a split as this is far less common in an SMSF context.)
Step 1: The NMS must provide the SMSF trustee with a copy of the Splitting Orders together with a notice under the Family Law (Superannuation) Regulations 2001 (Cth) regarding the split.
Step 2: The SMSF trustee must give each party a ‘payment split notice’ to formally notify the parties that the interest of the MS is subject to a split under the terms of the Splitting Order.
Step 3: Subject to the governing rules of the fund, and the requirements of the Splitting Order, the NMS must make a choice regarding how the split amount is to be treated and notify the SMSF trustee of that choice. In broad terms, the choices available to the NMS are as follows:
Option 1: Creation of a new interest in the name of the NMS.
Option 2: Transfer or roll over of the amount to the NMS’s nominated superannuation fund.
Option 3: Payment of a lump sum. This option is only available where the split amount constitutes unrestricted non-preserved benefits split from the MS or where the NMS has otherwise met a relevant condition of release.
Note: The choice by the NMS must be exercised within 28 days from the payment split notice or such longer period as the trustee allows.
Naturally, sharing an SMSF after a relationship breakdown is not advisable. Therefore, Option 1 is generally only implemented as part of preparatory work for one of the members to exit the SMSF.
Where a condition of release has not been satisfied, Option 2 is one of the more common options— ie, the split amount (known as ‘transferable benefits’ in this context) is rolled over to another fund, such as a new SMSF or a large public offer superannuation fund.
Step 4: Once Steps 1–3 are carried out, the SMSF trustee is broadly obliged to give effect to the choice of the NMS, subject to the governing rules of the fund and the Splitting Orders. The SMSF trustee must then calculate the amount to be transferred (see the commentary below regarding relevant base amount adjustments), determine the tax components and the preservation components and notify each of the parties regarding the split being implemented.
Where relevant, a roll-over of any remaining member benefits would typically occur in conjunction with the transfer of the split amount using the prescribed ATO forms.
Also, the fund’s records must be appropriately updated and relevant trustee resolutions prepared.
DBA Lawyers’ super splitting documents are designed to cover the SISA/SISR criteria and are drafted by our expert SMSF lawyers.
Base amount adjustment
If the Splitting Orders specify a base amount split, the base amount must be adjusted from the operative time until the date of transfer of the transferable benefits (see the definition of transferable benefits in reg 1.03 of the SISR) or the creation of the new interest. This is done by interest being calculated and added for the relevant period at the prescribed annual interest rate. The current rate for the 2023–24 year is 5.9%
Failure to implement documents under SISA/SISR
Splitting Orders are not self-executing and do not cover the additional obligations that apply to a super split under the SISA and the SISR.
The giving of the various notices in relation to a div 7A.2 split noted under Steps 1–4 above is an operating standard for regulated superannuation funds under reg 7A.02 of the SISR. Thus, failure to give these notices will result in one or more contraventions of s 34(1) of the SISA with each contravention attracting an administrative penalty equal to 20 penalty units.
The value of a penalty unit is currently $313 for the 2023–24 financial year. Accordingly, failure to implement appropriate div 7A.2 documents after Splitting Orders are obtained will result in each individual trustee of an SMSF being liable (on a strict liability basis) for $6,260 per contravention.
If the fund has a corporate trustee, each director will be jointly and severally liable for a $6,260 penalty.
Additionally, the failure to implement appropriate splitting implementation documents under the SISR may result in further negative consequences including claims being brought against advisers who were involved in the process, eg, if the adviser failed to point out the SISR documents required to implement a split.
Unfortunately, many advisers, including experienced family law practitioners, are not fully aware of the SISR criteria and thus they may not point out these aspects to their clients or the client’s other advisers (such as accountants and financial planners) who may also be involved with a split.
Impact on CGT roll-over relief
Splitting documents are also important in the context of the family law CGT roll-over relief provisions in the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
For instance, under s 126‑140(2), CGT roll-over relief can apply where an SMSF (or other small fund) transfers a CGT asset to another complying superannuation fund pursuant to a payment split for the benefit of a NMS. However, s 126‑140(2)(c) requires that:
the transfer is under provisions of the [SISR] dealing with superannuation interests that are subject to payment splits…
This requirement means a failure to have properly drafted splitting documents in place could jeopardise intended CGT roll-over relief.
Accordingly, the remaining member in the SMSF could be faced with a tax bill and possible penalties in connection with the relevant capital gain not being disregard as intended. Naturally, the departing member may benefit from this outcome in relation to the cost base of the roll-over asset having a refreshed market value cost base, so it does depend on who you are acting for!
DBA Lawyers’ Family Law SuperSplitting Documents for SMSFs and other services
DBA Lawyers offers a suite of Family Law SuperSplitting documents to assist SMSF trustees and advisers in implementing Splitting Orders under in an SMSF in compliance with the regulations.
In addition to the relevant notices and trustee resolutions required under the SISR, the document suite includes a detailed technical memo which provides a comprehensive overview of key points to consider when undertaking a super split in an SMSF, with general guidance on splitting orders, tax considerations (including the proportioning rule), the transfer balance cap, and much more.
For further information on these documents or to place an order, please click here.
SuperSplitting in an SMSF context is likely to give rise to other technical concerns, including restructuring the SMSF as a single member fund, transfer balance account issues, income tax consequences, including CGT liabilities, and stamp duty. Naturally, DBA Lawyers provides document and advice services to assist with these aspects.
Conclusions
Many advisers are unaware that Splitting Orders in respect of an SMSF are not self-executing and must broadly be implemented in accordance with the steps set out above in accordance with the relevant criteria and documents required by the SISR.
Accordingly, to ensure that clients are not exposed to significant penalties and further negative risks, it is critical that advisers obtain appropriate advice regarding the proper process to follow so that the various notices and other steps are followed in accordance with the operating standards in the SISA and the SISR.
Note that the commentary in this article is a general summary only and is not intended to be relied on as legal advice.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly SMSF training online. Bryce Figot is presenting a webinar on 7 July 2023 and a recording is available shortly afterwards. For more details or to register, visit https://register.gotowebinar.com/register/610544945094534742.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By William Fettes ([email protected]), Senior Associate, and Daniel Butler ([email protected]), Director, DBA Lawyers
DBA LAWYERS
17 October 2023
