SMSFs: CGT & superannuation transfers on marriage breakdown

In September ClearLaw, we told you about the Tax Commissioner's determination which allows superannuation interests transferred as a result of marriage breakdown to be transferred between funds without having to convert the assets to cash. Julian Smith and Amalia Moylan

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Splitting super on marriage breakdown - Family Law provisions

Superannuation interests can be allocated between a married couple when their marriage breaks down. This allocation may be effected through a Financial Agreement between the parties ( Superannuation Agreement) or by an order of the Family Court (a Property Order, under s 79). The relevant law is in Part VIIIB of the Family Law Act 1975 (Cth) ( FLA).

Although a Superannuation Agreement is binding on the parties, it does not have the same status as a court order - this is in contrast to a Property Order.

The options

The married couple has 3 options about how to deal with their superannuation in a marriage breakdown. The options are:

Agreement: The parties may decide (before, during or after the marriage) how superannuation interests will be treated if the marriage breaks down. The agreement is a "Superannuation Agreement" which is defined as follows:

• A financial agreement under Part VIIIA may include an agreement that deals with superannuation interests of either or both of the parties — as if those interests were property. (It does not matter whether or not the superannuation interests exist at the time the agreement is made.)
• The part of the financial agreement that deals with superannuation interests is a 'superannuation agreement' for the purposes of Part VIIIB.
• A superannuation agreement has effect only in accordance with this Part. In particular, it cannot be enforced under Part VIIIA.

(The definition is in Section 90MH of the FLA.)

Court order: If the parties are not able to agree how the superannuation interest will be split, then a party may ask the Family Court to make a Property Order.

Deferred: The parties may defer any agreement about how to split a superannuation interest. In these circumstances, the benefits are 'flagged' and the trustee of the superannuation fund is prevented from dealing with them until the flagging order (FLA section 90MU) is lifted by court order or agreement.

CGT and splitting super on marriage breakdown

Rollover relief is available to various parties in various ways. In summary, limited CGT rollover relief is available if a super split occurs pursuant to a Superannuation Agreement (as opposed to a Property Order). However, help is at hand with new legislation due to commence shortly which provides rollover relief for CGT events occurring as a result of a Superannuation Agreement.

Currently limited CGT Relief for Superannuation Agreements

Currently, trustees of small superannuation funds ¹ receive the benefits of CGT rollover relief in the context of a transfer of superannuation benefits upon marriage breakdown, whether pursuant to a Superannuation Agreement or a Property Order (section 126-140 ITAA97).

CGT rollover relief for spouses and trustees of funds other than small superannuation funds upon marriage breakdown is only available if an asset has been transferred to a spouse or former spouse because of:

• a court order or a maintenance agreement under the FLA; or
• a court order under a state, territory or foreign law relating to de facto marriage breakdowns.

CGT rollover relief for spouses and trustees is not available in the context of Superannuation Agreements: nor is it available in respect of arbitral awards made in the context of a marriage breakdown.

Help is at hand - New laws to cover Superannuation Agreements due to commence

The Tax Laws Amendment (2006 Measures No 4) Bill 2006 (the TLA Bill) proposes to extend the existing CGT rollover relief to a CGT event which occurs as a result of:

• a binding Superannuation Agreement under the FLA;
• an arbitral award under the FLA; or
• a written agreement that is binding because of a state, territory or foreign law relating to de facto marriage breakdowns.

As a result of these amendments, CGT rollover relief for CGT events occurring as a result of a Superannuation Agreement (which is currently only available to trustees of small superannuation funds) will be extended to spouses and trustees of all super funds.

The TLA Bill was read for a second time in the Senate on 16 October 2006. The TLA Bill has not yet received Royal Assent. It is proposed that the amendments will apply to CGT events occurring on or after the date of Royal Assent.

An explanation of the current law is below.

Explanation of the current law

1. Rollover relief available for trustees of Small Superannuation Funds (does apply to Superannuation Agreements)

   When a trustee of a small superannuation fund transfers an asset to another small superannuation fund on marriage breakdown, then a â?? same asset rollover' may apply. In that case, any capital gain or loss made by the trustee is deferred (ITAA97 section 126-140).

   But there are limited conditions...

   The rollover is available only if either of the following conditions are satisfied under ITAA97 section 126-140(1) and (2):

   • A non-member spouse serves the trustee of the small superannuation fund with a notice (under ITAA97 section 90MZA) waiving the non-member's rights under a payment split. As a result, the trustee transfers the asset (which was previously going directly to the non-member spouse) to another fund of which the non-member spouse is a member; or
   • The trustee otherwise transfers an asset to another fund of which the non-member spouse is a member under a payment split.

   Consequences of this type of rollover

   As a result of a rollover, the following consequences arise under ITAA97 sections 126-140(3) to (5):

   • Any capital gain or loss the trustee makes on the transfer of the asset is disregarded, and the CGT consequences of the transfer are deferred until a later CGT event happens to the asset (such as the disposal of the asset by the trustee who acquired it on transfer);
   • The acquisition cost for the trustee who acquires the asset on transfer will be the acquisition cost of the asset to the trustee who transferred the asset; and
   • If the trustee who transferred the asset acquired that asset before 20 September 1985, then the trustee who acquires that asset on transfer will also be taken to have acquired the asset before that time.

2. Rollover relief for the spouse (does not apply to Superannuation Agreements)

   Rollover relief is also available to the spouse in respect of CGT events involving spouses under ITAA97 section 126-5.

   Section 126-5 of the ITAA97 provides that:

   • There is a roll-over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse (the transferee), or a former spouse (also the transferee) because of:

     • a court order under the Family Law Act 1975 (or a corresponding foreign law); or
     • a maintenance agreement approved by a court under section 87 (or a corresponding agreement approved by a court under a corresponding foreign law). A â?? maintenance agreement' is a written agreement (under section 87 of the FLA) that provides for financial matters between the parties to the marriage. This is to be distinguished from a â?? Superannuation Agreement', see above; or
     • a court order under a State law, Territory law or foreign law relating to de facto marriage breakdowns.

3. Rollover relief for trustees of funds other than small superannuation funds (does not apply to Superannuation Agreements)

   Section 126-15 of the ITAA97 provides that:

   • There are roll-over consequences in section 126-5 if the trigger event involves a company (the transferor) or a trustee (also the transferor) and a spouse or former spouse (the transferee) of another individual because of:

     • a court order under the Family Law Act 1975 (or a corresponding foreign law); or
     • a maintenance agreement approved by a court under section 87 (or a corresponding agreement approved by a court under a corresponding foreign law); or
     • a court order under a State law, Territory law or foreign law relating to de facto marriage breakdowns.

   The consequences of this provision are that the same CGT rollover relief provided in section 126-5 (for spouses) — discussed above in 2 — is available to the trustee of the transferring fund. The trustee may be an individual or a company.

More information

For more information on the current law — or on the pending changes —, contact Julian Smith at Maddocks on (03) 9288 0555.

¹ Under ITAA97 section 995-1(1) a small superannuation fund is a complying superannuation fund with fewer than five members.