A couple of weeks ago I was filling in for Paul Rickard on 2GB’s Switzer Super Show and Peter Switzer and I were asked the following question from a listener – what happens to your super when you get divorced?

It’s a good question and one that’s often asked. In theory the super assets are included in a couple’s total balance sheet and split just like any other asset.

The couple can do this by mutual agreement or the Family Court can enforce its decision on the couple. There are formal processes in place to make sure that both parties can obtain relevant information about each other’s super accounts.

Sometimes when couples separate, problems with their super investments emerge and it becomes essential to fix these up before finalising the property settlement.

A case study to learn from

In 2013 the Federal Court dealt with an interesting case that involved an SMSF, which was a mess and may have been subject to fines and penalties if the ATO took action.

What value would you place on this particular super fund? Well let’s look at the background.

Mr and Mrs Linder were married for more than 30 years. He was a solicitor and Mrs Linder ran the house and raised their three children. Their youngest child, while still a minor, was ill for several years with a variety of serious medical conditions. While she was in hospital, her mother provided her with a high level of care and the husband worked and looked after their home and their other children.

Their financial affairs were reasonably complicated and the main job of the Court was to determine how their matrimonial assets should be split. Here I’ll only look at their super fund.

The SMSF

The SMSF had been set up in 1995. Its two members and individual trustees were Mr and Mrs Linder. The assets of the fund were cash in the bank and shares in Argo, an ASX Listed Investment Company, which had been purchased in a number of different transactions.

The husband told the Court that “at no stage did my wife ever take an interest whatsoever in the assets or operations of the Superannuation Fund or make any contribution towards it (sic) administration and management”.

The Court accepted this statement and decided that the husband was responsible for the SMSF.

The parties couldn’t agree about the super fund’s ownership of about 22,000 Argo shares (which are currently worth about $185,000). No evidence could be produced that the super fund had purchased them or that it actually owned them.

Ultimately, the Family Court decided that these shares weren’t assets of the super fund. As a result the super fund was deemed to have about $700,000 in assets.

Keep good records

This is an important lesson – clean documentation about the assets of your super fund is very important.

Since 2007, no financial accounts for the super fund had been prepared and no ATO return had been submitted.

Clearly the fund might have had ATO compliance issues. One expert accountant told the Court that in her view the fund had a “very high risk” of being in breach of a number of super law provisions and that the Tax Office might impose a penalty of $350,000. Basically she was saying the ATO would deem the fund to be a non-complying super fund and impose the high tax rates applying to super funds that apply when this occurs.

Her recommendation – for a cost of about $63,000, the super law breaches should be fixed and the fund closed, with money transferred to other super funds.

A different view

The husband and his advisers told the Court that they were confident that they could fix the fund up for a lot less and not face the penalties suggested by the accountant.

The fund’s trustees had definitely been slack in preparing annual accounts, regulatory returns and keeping accurate records, but the fund does seem to have been run appropriately. For example, none of the fund monies had been lent to fund members or their relatives. The fund doesn’t appear to have borrowed any money.

If the Court judgement has given us a complete picture of the fund’s activities, and based on my experience of fixing up SMSFs that have regulatory problems, the husband and his advisers seem to have come to a reasonable conclusion.

Ultimately, the Court decided that all of Mrs Linder’s interest in the super fund would be transferred to her former husband. But it also said the husband had “to indemnify the wife in respect of the financial consequences of her having been a member of the Superannuation Fund”.

The Court gave the husband the super fund but as each trustee is liable for any ATO imposed penalties, the Court said the husband should be liable for any ATO imposed fines on Mrs Linder. The Court judgement said, “…failure to properly manage the Superannuation Fund … should not be visited on the wife”.

What would have happened if all parties had agreed that the ATO would likely penalise the fund and its trustees? In my view, it would be best to sort out the super fund and see how much was left after it had been fixed and then deal with the remainder of the property settlement.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.