Divorce and Your DIY Fund

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Divorce+DIY

MANY MARRIAGES END in divorce and the many members of Australia’s self managed superannuation funds (SMSFs) are not immune to this heartache.

As there are more than 1 million SMSF members nationwide, it should come as no surprise that the assets of an SMSF are often the next big ticket item after the marital home in any family law settlement.

Good outcomes can be generated for both parties with a little communication and compromise.

Let’s work through a case study using a Commercial property held within an SMSF and tenanted by the associated business of one of the SMSF beneficiaries.

Case Study

Peter and Mary are divorcing, agreeing to a straight 50-50 asset split. They own their marital home, valued at $400,000, with no capital gains tax (CGT) issues to consider.

Mary operates a small business valued at $100,000 from a commercial property owned by their SMSF, valued at $300,000. The business pays a commercial rent rate to the SMSF.

Mary leaves the marital home but keeps the business. Peter keeps the home and takes a $150,000 loan against it to pay out Mary for her share of the two assets $500,000 joint value.

The problems arise with splitting the value of their $300,000 SMSF property.

Possible Solutions

Peter and Mary can remain separately invested in their SMSF. This is often a best outcome and relies on some goodwill between the two parties.

If Mary wished to keep the SMSF property while Peter wanted his $150,000 balance rolled out into another superannuation fund, she could not borrow against the property to pay Peter, as it is an existing SMSF asset.

Mary could find another investor to replace Peter; this could be a family member/friend who pays out Peter’s share within the same SMSF or into another SMSF related to Peter.

Another option is for Mary to make a non-concessional contribution of $150,000 to her SMSF to pay Peter.

Final Thoughts

Some of these approaches may raise questions of capital gains tax and transfer costs but in some cases, under SMSF pensions and duties relief, the impact can be reduced to zero.

Finally, Mary may sell the property with a longer leaseback, protecting the business location and maximising the value of the sale, which may produce a better outcome.

The issues will mostly be the same if the property is residential, except you may not rent the property to yourself or an associate.

Bottom Line: When there’s a large SMSF asset involved, divorce requires cooperation from many sources. The couple, and all advisers, must work together.

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