Administration, SMSF, Tax

$3m cap adds to divorce complexity

Divorce Division 296 tax SMSF Withdrawals Contributions Earnings calculation

Calculating a final financial position in the event of a divorce may become more difficult when the Division 296 tax is introduced.

SMSF trustees going through a divorce may cop an additional penalty due to the calculation methodology associated with the proposed Division 296 tax measure, the director of an accounting firm has said.

“In the context of Division 296 [and divorce], the biggest issue is going to be how to negotiate final financial settlements. I’ve been involved in a number of divorce matters where there could be tens of millions of dollars they are splitting and then they are squabbling about the last thousand dollars,” Cooper Partners Financial Services director Jemma Sanderson told attendees at The Tax Institute’s recent Super Intensive.

“These sorts of calculations may have an impact … and the consideration may well be that there’s going to be Division 296 tax implications on the split.”

Sanderson illustrated her point with a case study, where a couple, both with total superannuation balances of more than $3 million, had agreed to an equal split of their assets. As part of the divorce agreement, the husband transferred $785,000 to his ex-wife’s super account.

Specifically, Sanderson pointed out because withdrawals are added back into the earnings calculation for Division 296 and contributions are excluded, one of the parties to the divorce may face a slightly higher liability under the tax.

“[The husband] has split across $785,000, but there’s a Division 296 tax implication on all of that, whereas in [the wife’s] situation, it gets removed as a contribution. So how do you equalise for that if that’s what you’re trying to get to?

“The outcome is you might just have to suck up [the difference]. Maybe you can do a back-of-an-envelope calculation of what it might look like and agree on a value being transferred or a proportion being transferred, rather than trying to make an adjustment later, because that’s when things start to really become quite painful from that perspective.”

She added the tax would only serve to add a layer of complexity to an already burdensome process, especially in cases where a fund may need to be wound up.

“It’s always a bit of a disaster where a self-managed super fund is the balancing item in a divorce because there’s always leftovers,” she said.

“There’s always something else going on within a fund, like franking credit refunds, which means that it can’t be wound up or there’s something in there that makes it very difficult to get members out of a self-managed super fund.

“Particularly with SuperStream, if the member wants to roll over their own account to another fund, it’s got to be done by SuperStream, whereas if it’s a family law split, it doesn’t have to be done by SuperStream, so it’s also managing that process.”

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