A divorce may be insufficient to allow an SMSF member to engage in a transaction with their former spouse as an unrelated party with tax law and family law still capable of tying separated couples together in regards to superannuation, an SMSF legal expert has warned.
Townsends Business and Corporate Lawyers superannuation online services division managing solicitor Jeff Song said the Superannuation Industry (Supervision) (SIS) Act does consider whether a former spouse can be a relative and gives differing definitions dependent on the circumstances.
Song pointed out the SIS Act has two definitions – in section 10 and section 17A – and while the latter does define a former spouse as a relative, it is not relevant for determining if there is any prohibited loan or financial assistance to a member’s relative under section 65 of the act.
“The relevant definition is in section 10 and it doesn’t include a former spouse as a relative of the member,” he said.
“On the face of it then, there is no general prohibition on the fund trustee from lending money or giving financial assistance to the member’s former spouse.”
Song, however, warned any transaction that created indirect financial assistance to someone who was a relative, such as a child of the member and their former spouse, would be an issue of concern to the ATO.
“The ATO’s view as expressed in Self Managed Superannuation Funds Ruling 2008/1 is that section 65(2)(b) [of the SIS Act] also encompasses any arrangement where the loan is to a non-relative but indirectly gives financial assistance to a member’s relative.
“If the arrangement is with mutual understanding that the monies so borrowed from the fund would be used for the benefit of their children (or any other relatives of the member), arguably there is provision of prohibited indirect financial assistance.”
He added that further ties between separated couples also exist as the SIS Act held a broad definition of a related party and a family law order was capable of making that connection.
This could occur where an SMSF member’s superannuation interest was subject to a payment split in favour of their former spouse under a family law consent order, he said.
“Even where the former spouse has never had a membership interest themselves, the SIS Act and the regulations extend the definition of a member for SMSFs and deem the former spouse themselves as a member of the fund from the operative time of the splitting order,” he said.
He said this could be avoided by converting the former spouse’s entitlement under the court order into a superannuation interest for them in another super fund or cashing out the benefits to the former spouse if they had met an unrestricted condition of release.
“This example highlights the importance of seeking the appropriate advice and to carefully complete the super splitting process right to the end. A Family Court order is a powerful document and it might offer a false sense of comfort that the process is over,” he said.
“There are, of course, many other circumstances where a former spouse could be considered a related party of the fund, including via general law partnership or involvement in the same company or a trust. Any transactions would, of course, be subject to the sole purpose test and the investment strategy requirement.
“Trustees should not assume that a member’s ex-spouse or other non-relatives, such as distant family members or friends, are not related parties of the fund, but should seek professional advice when considering any transactions with any of them.”
