Superannuation and SMSFs are becoming increasingly complex, especially in a family law situation.
Tax issues, valuation traps and managing pension and asset transfer strategies all arise when considering superannuation in a financial settlement. COVID-19 has created further complications with uncertainties around values, cash flow and liquidity.
Katie Timms shares with us her top 5 tips for dealing with superannuation and SMSFs in family law.
Even before the impact of COVID-19 on financial markets, valuations of assets within SMSFs remain a complicated area. Even though the ATO requires that all assets within a SMSF be reported at market value at year-end, this can sometimes still mean properties have been reported at older values due to an old belief that properties only needed to be revalued every three years.
In addition, ambiguity over how to value an unlisted trust or company can lead to varying values and member balances being reported.
2. Capital Gains Tax relief
While CGT relief is provided as part of a family law split, it is vital that the nuances of the relief are understood for both parties. Knowing how to access the relief (ie assets must be transferred not sold) is the only the first thing to consider.
Making sure you understand whether the SMSF is correctly reporting a deferred tax liability, and how to successfully juggle with a member in pension may add value to your clients that you hadn’t considered.
3. Specific asset issues
The ability for SMSFs to invest directly into a property, and the ability to borrow using a limited recourse borrowing arrangement have been positives for some, especially where the property is used in their own business.
Unfortunately, the unwinding of these when needing to split a fund can create a number of issues. Whether or not a property will sell, whether the right person is able to retain their business premises, or whether a bank will refinance are unknowns, and can create significant complications in an already trying time. Understanding the options to restructure will help your clients obtain what they need.
4. Understanding a member account
A member account within superannuation carries with it different preservation and tax components that should be considered in determining how superannuation could be split.
In addition, those members that are running multiple pensions offer up additional considerations in determining how to best split superannuation interests. Ensuring you understand exactly how these operate can mean receiving a more equitable split for both parties (even considering a double split!)
5. Paperwork & timing
Too often the SMSF accountant is left out of the conversations between a family lawyer and their client, meaning complications can arise when it comes to executing an Order. Ensuring there is enough time to transfer or dispose of assets is a common issue, as is making sure accounting is current to be able to provide a rollover benefits statement to a new fund.
Add in specific asset issues, transfer balance cap reporting deadlines and valuation matters and timelines can significantly drag out.
The lesson: Engage your SMSF Specialist early. They will be able to assist with all of the above to make sure there are no hidden pitfalls in the split process.
If you have any questions regarding SMSFs or Family Law contact Katie Timms for advice.