With as many as 50% of marriages said to end in divorce, it comes as no surprise that the way superannuation is handled among separating spouses is complex. All superannuation (SMSF or otherwise) is considered ‘property’ in divorce proceedings, meaning it needs to be split according to court rulings or out-of-court separation agreements. This is complicated enough, but SMSFs carry additional rules and complexities – particularly when that SMSF owns residential or business real property.
What happens to SMSF property during divorce?
SMSF-owned property is a difficult asset to split. When dividing up balances or liquidating shares, things are somewhat simpler, and percentages can be applied based on the agreements set out within the divorce proceedings.
Property, however, presents a suite of issues. In many cases, a loan has been taken out on the SMSF property. The property’s remaining loan balance, gearing status and current market market conditions can all make the sale of that property a fairly undesirable solution for all involved members.
To aid in decision-making, an SMSF property valuation may be sought. If the property has been recently purchased or macroeconomic activity has negatively impacted the property market, it may suggest that the sale of the property would be an undesirable solution for all involved parties.
When SMSF-owned property is of a commercial nature, further complications can occur if a member-owned business is leasing the property back from the fund. This type of arrangement is not uncommon in SMSF investment strategies; but, in the case of divorce, property splitting can present significant issues for not only the fund, but businesses associated with members.
What alternatives are there to selling SMSF property during divorce?
If the divorce is an amicable separation, the fund may be able to continue with all existing members in a similar arrangement. Particularly when an SMSF property valuation indicates that the sale of the property is not a desirable solution for the fund or the divorcing members, establishing an agreement that allows the fund to continue with its current asset split may be a viable solution.
Can you protect your SMSF property from the impact of divorce?
Most people don’t consider divorce as an issue when they’re in a happy marriage. When it comes to investing in property with your SMSF, however, it’s worth thinking about possible exit plans.
Setting a buffer of liquid assets or a minimum cash holding to protect the fund in the event of a ‘fire sale’ of the property is often recommended. Members may also benefit from setting out an agreement on exit planning in the event of a separation before the property is purchased, to allow for objective decision-making ahead of any potential discord.
It’s also important to consider how repayments on LRBA-purchased properties would be managed if the property ended up being owned within a single member fund. Contribution limits often make meeting repayments difficult for a single member, which further heightens the need for expert SMSF family law advice for property.
If you’re obtaining an SMSF property valuation as part of divorce proceedings, contact SMSF Valuation Reports for support and guidance.
Information in this article is general in nature and does not represent true SMSF financial advice.