Administration, Compliance, SMSF

Divorce breaks asset transfer limits

Divorce SMSF Wind-up SIS Act Assets Trust deed

Trustees winding-up a fund should be aware there are limited circumstances when assets can be transferred to a related party but these fall away in the event of divorce.

A senior SMSF auditor has warned practitioners and trustees there are limited circumstances to transfer assets to a related party when closing down the fund, unless the wind-up occurs as the result of the collapse of a marriage.

“Where the wind-up is a result of a marriage breakdown, there is an exception in the Superannuation Industry (Supervision) (SIS) Act for assets in an SMSF that can be acquired by a related party, which includes illiquid assets,” ASF Audits head of education Shelley Banton told attendees of a webinar hosted by the Institute of Financial Professionals Australia last week.

“If you look at section 66.2B, that allows for whether a member and his or her spouse are separated, and there’s no likelihood of cohabitation being resumed, any asset allowed in an SMSF can be transferred to a new fund as long as it’s allowed under SIS Act and allowed under the trust deed, which also includes a life insurance policy and it also extends to units in a pre-99 unit trust.

“You need to be wary of this, because without that marriage breakdown, there’s only a few assets that can be transferred across to the new fund or SMSF, which include listed shares, business real property, investments in widely-held unit trusts and 13.22C trusts.”

While the requirements on which assets could be transferred were clear, she noted removing a trustee who had become uncooperative as a result of separation was less straightforward.

“There could be a clause in the deed that allows them to be removed but without a clause like that, you might find yourself effectively in a wind-up stalemate simply because one of the trustees is being hostile,” she explained.

“What if the deed says that there needs a majority to remove that hostile trustee and there’s only two trustees in the fund? Well, it’s going to be an impossible task to achieve.

“You could apply to the ATO as a regulator to remove that trustee, which is going to depend once again on the deed. You can also, as an alternative, make an application to the court as another option.

“[Proceeding to court] is certainly something to consider before you go down this path. It’s definitely not for the faint-hearted, but it just goes to show how everything can go to custard in a heartbeat and some of the measures you have to take in order to get things back on track,” she said.

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