Is breaking up harder for couple members of an SMSF?

Breaking up a marriage or relationship is hard on many levels, and the money put aside in superannuation is another (often substantial) asset that needs to be dealt with when couples have to consider dividing possessions in the event of a split.

Naturally there are regulations drafted to deal with dividing super fund interests, however with SMSFs, splitting super has the potential to turn into a splitting headache due in no small way to the fact that one’s “ex” also has interest in, and control over, the retirement nest egg.

The legal reality is that every SMSF member must be either an individual trustee or a director of the fund’s corporate trustee. In the unfortunate (but certainly not uncommon) event of a relationship breakdown, this necessarily will also become a disagreement between trustees.

And remember, as well as disagreements between partners in a marriage or a de facto relationship, a split can also involve close relatives such as parents and children.

According to the rules governing SMSFs, trustees must continue to act in accordance with the trust deed and the super laws, which includes acting in the best interests of members — which could now include a possibly antagonistic ex-partner.

The very real problem can be that the breakdown, which may be connected to personal or business issues and possibly have little to do with superannuation matters, can escalate to become problematic to the efficient running of the fund.

The ATO, as regulator of SMSFs, recently published a guide titled “Superannuation and relationship breakdowns“. The guide reminds SMSFs that the duties of a trustee continue even if the trustees are in some kind of dispute. “Despite any difficulties you may have with an individual on a personal level, as a trustee you must continue to act in the best interests of all members at all times,” the guide says.

The ATO says that in such situations, a trustee cannot:

  • exclude another trustee from the decision-making process
  • ignore requests to redeem assets and roll money over to another regulated complying super fund
  • take any action that is not allowed by Superannuation Industry (Supervision) Act 1993 (SISA) or the SMSF’s trust deed.

Failure to comply with superannuation law following the breakdown of a relationship between trustees can be costly for all members of an SMSF. The worst case scenario would be that the SMSF is declared non-complying by the ATO, resulting in significant tax consequences, as non-complying SMSFs are not entitled to receive concessional tax treatments and the assessable income of the fund will be taxed at the highest marginal tax rate.

Another longer-term consequence could be disqualification from acting as a trustee, effectively stopping someone from running an SMSF in the future.

 

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