Accountants & Financial Advisors: Superannuation, Divorce and the Property Settlement Process

Superannuation can often be a considerable asset in the overall asset pool and you may need to assist your clients, in collaboration with a family lawyer, with the separation of these assets. In this article we explore what’s involved and what you should keep in mind throughout your clients’ divorce.

Related: Maintaining relationships with separating couples as an accountant or financial planner

Superannuation and divorce explained

While some separations are straightforward, for clients with more complex financial structures, separation and the division of assets can be far more involved. For example, this is often the case if your clients have self-managed super funds (SMSFs) and have structured their affairs in a certain way. As their financial advisor the role will often fall to you to reflect on whether a SMSF will still be appropriate and to determine what is going to work best for them moving forward.

This is particularly important when perhaps one of them has not been as involved in the management of the self-managed super fund given that both parties will want to work toward achieving a “clean break” from each other financially.  As part of a property settlement they will generally be looking to split their member entitlements – usually with one person exiting from the fund as part of their settlement while the other person may remain.

Depending on the nature of the assets and whether the fund holds assets such as shares, real estate, money in the bank or commercial property, consideration will need to be given as to how best to extricate one person from it. Depending on which party you may continue to assist following separation, consideration may be required as to whether or not the person exiting is going to need their own self-managed super fund or not.

Related: Accountants, Financial Planners & Family Lawyers: Working together for the optimal client outcome

This process gives rise to numerous questions such as: 

• What assets does the super fund have?
• What are the options to roll out a member’s entitlement?’ 
• Are there any assets that need to be sold to make that happen?
• Does there need to be a superannuation split to achieve a broader objective as part of the property settlement? 

There are also complexities which arise from a family law perspective around ensuring the Fund’s compliance and addressing the relevant procedural fairness requirements and other regulations when splitting superannuation.  So it helps a lot if you are working together with a party (or occasionally with the couple, where involvement with both is still appropriate) as well as their family lawyer, to get early advice about how these questions and complexities will be addressed.

As far as any property settlement process is concerned, superannuation forms part of the pool of assets that is divided between the parties. In most circumstances it’s really about looking at what is in the pool overall, how those assets came to be part of the pool and what contributions each party made to the pool. We then look at what are called ‘future factors’. That is, taking into account is the ability of one person to move forward, relative to the other. 

Related: Identifying & valuing the asset pool. How accountants can help.

From there, it is then about looking closely at what is just and equitable as far as who keeps what, and considering how superannuation sits in that equation. It needs to be determined what is going to be a fair split, because if people are young, they cannot touch their super until they satisfy the conditions of release. Whereas for people who are older and nearing retirement age, or who have already reached retirement, the composition of their settlement and whether that includes superannuation, it is not as much of an issue. So, it is about thinking how to deal with it as part of their overall planning and working with your client’s family lawyer to work out a plan that is going to meet all of their objectives.

Divorce and superannuation splitting – Where mistakes can be made

As experienced family lawyers, we’ve seen that mistakes can be made in the settlement process when there have been changes in accountancy advisors in the past. Or, the client is not up to speed with their super fund by being non-compliant and not taking certain steps, which can cause significant issues at the time of putting a superannuation split in place. 

One example of this is a fund that included a commercial property. The separating couple operated their business from that commercial property and had a lease in place between the business controlled by them and their self-managed super fund. However, they had not been paying rent at the market rate so there was money owed by the parties to the super fund, which needed to first be addressed.  Other issues can arise where parties have directed dividends earned on shares owned by the SMSF into an account into one of the parties personal names, which required funds to be repaid prior to a split occuring. Often the parties don’t appreciate the significance of these compliance issues and these may only be uncovered at the time of a property settlement. 

Issues like these need to be addressed before a split of super can occur. This was only really uncovered because as part of the separation process, there was some degree of scrutiny around whether things had been done properly.  

These types of issues have occurred where the people involved have not had their accountant or financial advisor actively involved in the day to day management of the Fund.  

What to keep in mind as advisors

What is most important for you to know as an accountant or financial advisor is that there are issues that can arise splitting superannuation in a settlement where the assets owned by the Fund need to be sold to achieve rolling out one parties member entitlement. For example, if the self-managed super fund owned some real estate worth $600,000 but only has $30,000 in the bank where rent gets deposited. If you are wanting to roll out one person’s entitlements into another Fund, you will need to look at selling that real estate in order to get the money out or if that is preferable to avoid, to look at alternative options as to one person retaining a greater share of superannuation and the other taking assets outside of superannuation pool. 

What other options may be available depends on what else there is in the asset pool as to what is going to be the best approach. For example, somebody can keep the premises where the business might operate from, if they are also keeping the business, provided there are other assets in the pool from which to draw from.

The good thing about doing financial settlements in this way is that it gives the client an opportunity to make adjustments to member entitlements where you wouldn’t otherwise be able to.

The key element here when superannuation, divorce and property settlement is involved, is to ensure you are having early conversations with your clients family lawyers, so you can run through a range of different scenarios with your clients as to how the distribution of assets will occur.