When a relationship breaks down, superannuation is treated as a form of property and can be divided between the parties as part of the settlement.
While the family law process determines how super is split, implementing that outcome within an SMSF can be more complex than with a public super fund. The structure of the fund, the assets it holds and the way the split is carried out can all have compliance implications that auditors must consider.
Legal basis for the split
Superannuation can only be divided under a Family Court order or a binding financial agreement made under family law.
For audit purposes, clear documentation is essential. This generally includes the court order or agreement, calculations supporting the split, and trustee minutes showing how the transaction was implemented. Without these documents, it can be difficult to confirm that the split has been carried out correctly.
Changes to the SMSF structure
Divorce often leads to changes in the structure of the fund itself. In many cases one party leaves the SMSF entirely, rolling their benefits to another super fund or establishing their own SMSF.
This can involve:
- Ceasing membership of the fund
- Resignation as trustee or director of the corporate trustee
- Changes to shareholdings in the trustee company
- Updating the SMSF trust deed if required
Auditors will review these changes to ensure the fund continues to satisfy the definition of an SMSF and that the required documentation has been completed.
Valuing member balances
Unlike large super funds, SMSFs do not always have up-to-date daily valuations of member balances. Where assets such as property or unlisted investments are held, updated valuations may be required before the split can occur.
Auditors will typically look for evidence supporting the values used to determine the members’ balances at the time the split was implemented.
Structuring asset transfers
Many SMSFs hold illiquid assets such as commercial property. Where assets need to be transferred or sold as part of the settlement, the transaction may need to be structured carefully to ensure that capital gains tax rollover relief is available under the family law provisions.
If assets are sold to fund a rollover to another super fund, capital gains tax may arise and should be considered when determining member balances.
Understanding tax and preservation components
Superannuation balances consist of different components, including taxable and tax-free amounts as well as preserved and unrestricted benefits. When a superannuation interest is split under family law, these components are generally divided proportionally.
Accurate reporting of these components is important and will usually be reviewed as part of the audit.
Common audit issues
Divorce-related SMSF transactions often involve multiple steps within a short period of time. Some of the issues auditors frequently review include:
- Evidence supporting asset valuations
- Trustee resolutions implementing the split
- Rollover documentation where a member exits the fund
- Correct treatment of tax components
- Changes to trustees and fund structure
- Documentation supporting asset transfers or sales
Clear documentation across these areas helps demonstrate that the fund has implemented the super split correctly and continues to operate in accordance with superannuation law.
Need help with complex SMSF audits?
Divorce and family law splits can add significant complexity to an SMSF audit. The team at Audit your Superfund works with accounting firms across Australia to review complex transactions and ensure SMSFs remain compliant.
If you would like to discuss how we can support your SMSF audit work, contact the Audit Your Superfund team.