What happens to my SMSF if I get divorced?
The splitting of super is governed by the Family Law Act 1975 (FLA) which allows a member’s super interest to be split to a spouse or flagged which defers the splitting of a member’s super to a later date.
It is advisable to seek guidance from professionals such as lawyers, accountants and SMSF specialists when determining how to split your SMSF. These professionals collaborate to address legal considerations, valuation matters, tax implications, and compliance with superannuation laws and regulations (SISA).
Flagging is not common in a SMSF but can be used to defer the payment split where the recipient party is close to meeting a condition of release so they can access super without having to transfer it to another fund. There is no automatic lifting of a flag which can only be done by a Superannuation Agreement or by a Court Order.
What is Splitting in an SMSF?
An SMSF member’s super interest is considered to be “property” which can be split in whole or in part to a non-member due to a divorce or a breakdown of the relationship.
Superannuation interests can only be split by agreement known as a “superannuation agreement” or by court order which forms part of a financial agreement (splitting order).
Hint – The reference to “the member” under SISA is the member spouse who is splitting their super interest. Reference to “the non-member” is the recipient spouse of the super interest. Generally, where both spouses are in the same fund “the member” remains in the SMSF and “the non-member” exits the fund.
Can only married couples split their super interests?
Both married and defacto couples, including same sex couples, can split their super interests.
Is it compulsory for couples to split their super interests?
No, it is not compulsory, but when a relationship breaks down, both parties generally choose to end financial connections.
Are there any super interests in an SMSF which are un splitable?
A member’s accumulation or pension interests can be split. However, the following interests are not splitable:
- super interest less than $10,000
- early release payments made to a member spouse which satisfy the following conditions of release:
- compassionate grounds,
- severe financial hardship, and
- temporary incapacity
What is a Superannuation Agreement?
It is an agreement made between both spouses in accordance with the FLA to divide their superannuation interest. It is binding on the SMSF trustee.
Superannuation agreements are not valid until served on the SMSF trustee which must have a copy of the decree of divorce or if not divorced a copy of the separation declaration attached to the agreement.
Spouses may draft their own agreement without Family Court validation, but this is only advisable if they have relevant expertise. Agreements prepared with legal assistance are less likely to result in litigation.
However, to be a binding agreement the FLA requires the following:
- the agreement must be signed by both parties
- a declaration from the relevant legal practitioner stating that the spouse has obtained separate independent legal advice before signing the agreement
What is a Court Order?
The Court can step in and make the following orders:
- Splitting order – when there is no superannuation agreement
- Consent order – when both parties are in agreement but choose not to complete a superannuation agreement
- Financial Orders – when both parties cannot agree on how to split property the Court can decide how it is to be split
Generally, superannuation is split via a superannuation agreement or a consent order.
Hint – the spouses can make an application for consent orders directly to the Court as the use of a legal practitioner is not compulsory but typically the spouses engage their own legal practitioner to prepare the application.
How can a superannuation interest be split?
The FLA allow payments to be made using the “base amount method” or a “specified percentage applying to all splitable payments”. Generally, the percentage-only interest method applies to constitutionally protected fund or government employee funds. Thus, SMSFs will use the base amount method.
Base Amount Method
The agreement or the Court orders will specify a $ amount or a formula to determine the amount payable using the base amount method.
Hint– a payment sourced from a pension in accordance with the FLA is considered to be a lump sum in relation to determining the base amount
Example – Formula in relation to determining the base amount
- Fred is required to pay 30% of his super interest to Eve (non-member spouse)
- $200,000 less Eve’s (non-member spouse) own interest in the SMSF
- 65% of the total value of the SMSF less Eve’s (non-member spouse) own interest in the SMSF
The split is known as a “splitable payment” which in accordance with SISA can be:
- a new interest created in the same SMSF for the non-member spouse (this is a separate interest to any existing member benefit)
- transfer or rollover to another complying superannuation fund for the non-member
- the non-member can cash out the payment as a lump sum payment where the payment consists of unrestricted non preserved components or the non-member satisfies a condition of release such as turning 65, permanently retired after turning 60 or retiring after turning 60
How the benefits are dealt with depends on the superannuation agreement or court orders which may prescribe what the non-member must do or allow the non-member to choose.
Timing of the split
It is crucial to ensure the payment split is instituted at the “operative time” which is prescribed as:
- superannuation agreement- the 4th business day after the day on which a copy of the superannuation agreement has been served on the SMSF trustee i.e. the SMSF trustee is served on the 1st August 2025, the operative time is 7th August 2025 as Saturday and Sunday are not business days
- court order – the time specified in the orders
Failure to make the payment split at the operative time
The base amount is adjusted to include interest for the period of time from the operative time until the end of the day just prior to the payment split being made. This is known as the “adjustment period”. The “adjusted base amount” includes the base amount and the interest. The interest rate from 1 July 2025 is 6.9% p.a.
Tax and Preservation Components
In relation to a superannuation splitting order the payment made from the member spouse to the non-member spouse retains the preservation status and underlying tax components of the member spouse. Preserved benefits are locked inside your SMSF until a condition of release such as turning 65 is attained or retiring after turning 60. However, unrestricted non-preserved benefits mean your super benefits are fully accessible and can be withdrawn from the fund.
Example – tax and preservation components transferred from the member to the non-member
Joe is 63 and has $400,000 accumulation super interest in his SMSF which is 55% preserved (pres) and 45% unrestricted non-preserved (unnp). The tax components consist of $100,000 tax free (25%) and $300,000 (75%) is taxable. Betty is 55 and is Joe’s wife. Betty is also a member of Joe’s SMSF and has a super benefit of $200,000 which is 100% pres. and 100% taxable. Joe and Betty are getting divorced. As part of a splitting order Joe is ordered to pay Betty $100,000 from his super interest. Betty will rollover the $100,000 benefit to her industry fund. Betty will also roll-over her member benefit of $200,000 to her industry fund and exit Joe’s SMSF.
Betty’s industry fund will combine both rollovers into one accumulation account.
Betty’s new benefit will consist of $300,000 made up of $255,000 preserved component and $45,000 unrestricted non-preserved component. The underlying taxable components will be $25,000 tax free (25% x $100,000) and $275,000 is taxable (75%x $100,000)+$200,000.
Betty is under 60 and has not met a condition of release. However, as part of her super benefits include an uunp component she is able to withdraw up to $45,000 from her industry fund. However, as she is under 60 tax is applicable to the lump sum withdrawal. If she withdrew $20,000 of her uunp component she would be subject to tax at the maximum tax rate of 22% on $18,333 being $4,033. The tax free component is 8.333% x $20,000 which is $1,667.
Can I keep my SMSF after my divorce?
Addressing this question is important. Maintaining your SMSF may require reviewing and potentially restructuring the trustee, such as changing from individual trustees to a corporate trustee with a sole director or appointing another family member as the second individual trustee.
Any changes to the trustee structure should be made in compliance with SISA and legal requirements and assessed for suitability to your situation.
Another option is to wind up your SMSF and transfer your superannuation benefits to another complying fund.
Advice should be sought from a financial planner to assist you to decide the best strategy for your circumstances.
What happens if the parties are hostile?
Removing a hostile trustee can be problematic unless there is a specific clause in the fund’s trust deed dealing with that situation. A lot of deeds require a majority to remove a trustee which means there is a stalemate if there are only two trustees and one of them is hostile. Depending on the fund’s trust deed you may apply to the ATO to remove the trustee or failing this the Courts could be approached but this is often costly and time consuming.
Documentation
Having proper documentation to split your superannuation interest is crucial. The documentation includes:
- Payment Split Notice
- Information must be provided to the non-member spouse
- Non-member spouse must request what they want done with their payment split
- The SMSF must action the request
There are very specific timeframes for the actions above which must be adhered to. Failing to document the process correctly can result in denial of CGT relief, denial of stamp duty reductions, breaches of SISA and interest for late payments.
Other Considerations
Stamp duty on the transfer of property which is a State or Territory duty with each jurisdiction having their own legislation but generally include exemptions or reduced duties due to a relationship break down.
Capital Gains Tax (CGT) Relief
An SMSF can access Capital Gains Tax relief when, as part of a payment split, a property or other asset is transferred to another complying superannuation fund.
Proper notices and documentation are essential for CGT rollover relief.
Hint – the transferring SMSF will not be subject to CGT the receiving fund will inherit the cost base and acquisition date and is subject to CGT when the asset is disposed of.
Transfer Balance Account
Where a retirement phase pension is split to a non-member spouse either as a lump sum or a percentage of the member spouse’s super income stream benefits can affect the transfer balance account for the member and the non-member spouse. The payment split is reportable to the Australian Taxation Office (ATO).