Podcast: Superannuation and Family Law

Nadine:

My name is Nadine Udorovic and I am a partner at Nicholes Family Lawyers. Today I am joined by my colleague, Kate Wraith-Bell, Senior Associate, to discuss the interaction between Family Law and Superannuation Law as well as the different asset protection strategies available to individuals going through a divorce or the breakup of a domestic partnership.

We are fortunate today to be joined by Russell Krupp, Special Counsel at Morrows.  Founded in 1960, Morrows has been committed to providing the highest quality advice in the areas of accounting, business solutions, wealth management, taxation, superannuation and family office services.  Russell joined Morrow’s legal team with over 10 years’ experience in both public and private sectors and has expertise in taxation, trusts and superannuation law.  In the context of arduous and emotionally-draining Family Law proceedings, it can be easy to overlook the long-term financial consequences of decisions made at settlement.  Yet with a proper appreciation of the investment strategies and asset protection mechanisms that can be put in place, individuals can ensure that their financial future is secure.

Thank you very much for joining us today, Russell, to share your insights into the ways in which family law and superannuation law intersect and in particular the crucial investment strategies and asset management tools that can be employed.  Welcome, Russell.

Kate:

Russell, we learnt from your colleague, Kirsty McCormack, in an earlier podcast, that superannuation is a $3 trillion industry, which I personally find mind-boggling! A lot of money is invested in superannuation.  As family lawyers, we see superannuation issues in almost 100% of our cases, but from your perspective, what are the keys in which superannuation law and family law can interact?

Russell:

Thanks Kate.  There are a number of different ways – normally in my work, they interact when we are implementing asset protection strategies pre- relationship breakdown; these strategies might involve a Binding Financial Agreement as a component of the strategy, so they interact with some of the commercial structuring that we do -it’s a big component, the family law considerations.  They can also interact in dividing up the property as part of the relationship breakdown, there are some provisions which we will get to later, regarding the regime of the split of superannuation in a relationship breakdown.  Thirdly, you might, for example (and this has happened in my experience), where there is a lumpy asset which is held in an SMSF by which I mean an asset which is not really liquid, like a property, and the couple splits up.

In this particular example that I am thinking of, the SMSF had a residential property, which was difficult to deal with, with the relationship breaking down.  What actually happened was that one of the partners bought the residential property from the SMSF on arms-length terms, and that essentially replaced the lumpy asset, the residential property, with cash, by buying it from the super fund and that made it easier to split the interests because we were dealing with cash,  Obviously, you need to have the cash to achieve that, which not everyone will have, but a lesson to take away from that is really not to have those single assets to be assessed, but that is the third way in which superannuation law and family law can interact.

Nadine:

For the benefit of our listeners, an SMSF is a Self-Managed Superannuation Fund – we will obviously touch on the self-managed super funds a bit later.  So Russell, in terms of looking at some recent case law of Munro v Munro, can you explain the concept of a Death Benefit instruction and how these disputes have arisen in the family and superannuation law context?

Russell:

Yes, sure, so a member of a self-managed or SMSF super fund is able to give the trustee of their SMSF instructions on how they want their benefit to be paid out on their death (and if you don’t do that – give instructions to the trustee of the SMSF – it is generally up to the trustee’s own discretion).  Normally, that is not a problem, but in some situations, interests of the trustees of the deceased’s SMSF and the executors of the estate of the deceased, may not align with each other – this is the context of this Munro case referred to above.  The situation was a dispute between the individual SMSF trustees who were the second wife of the deceased and the second wife’s daughter, so the deceased’s step-daughter.  They were on the one side, and on the other side were the executors of the member’s estate, who were his daughters from the first marriage.

The dispute was about a kind of death benefit instruction called a Binding Death Benefit Nomination.  What that is: the member gives a nomination to the trustee of the fund, saying that this is how I want my death benefit or super benefits paid when I die.  What happened was that the trustees of the SMSF who were the second wife and the step-daughter, refused to give standing to the Binding Death Benefit Nomination because they thought that it was not binding on them, so the two executors, the two daughters from the first marriage, sought a declaration from the Court that the Binding Death Benefit Nomination was binding on the trustees.

The issue was the language which was used in the Binding Death Benefit Nomination around the deceased estate and whether or not this complied with the superannuation law and SMSF’s trust deed.  What had happened was that Mr Munro had said in his Binding Death Benefit Nomination to pay his death benefits to (quote) “the trustee of my deceased estate”.  What did he actually mean?  He did not actually refer to his legal representative; he chose to use those specific words, so the issue was the language used.  What the Court found (and I think this was the Queensland Supreme Court decision) was that the Binding Death Nomination was not binding on the trustees, and the reason why was that the deed, which is the source of the requirements for paying a Binding Death Benefit Nomination by the trustees, said that the Binding Death Benefit needed to nominate someone who is a dependent of the deceased, or the deceased’s legal personal representative.  Otherwise the Binding Death Nomination would not be binding and the trustee of the deceased estate was neither a dependant nor the legal personal representative because the executor of the estate and the trustee of the estate are different things. The executor of your estate generally holds the property of the deceased, to administer the estate, so they call in the debts, collect the assets, maybe admin expenses, so that is one particular legal role.

The trustee of your deceased estate generally deals with the assets after they have already been administered, so the Court said that those are two different things, we have to assume that you meant what you said in the Binding Death Benefit Nomination, that person or entity that you nominated was not a dependent nor a legal personal representative, so that meant that the Binding Death Benefit Nomination was not binding on the trustees and that meant that the payment of death benefits then fell to the discretion of the trustees

Nadine:

Because we normally see them and they are specific in terms of a child or a spouse or a person with a name and a date of birth – very interesting, that.

Russell:

Well, it is a cautionary tale. What it really means is that you must ensure that it is binding on the trustee and really be mindful of blended family situations where the interests of trustees of the SMSF and the executors might not align with each other.

Nadine:

Yes, and worth getting some advice, I think, especially about the Self-Managed Super Fund, because they are always a little more complicated that your standard industry set-up; to come to someone like yourself to get some advice around these sorts of Binding Death Benefit Nominations.

Russell:

Your super is like – aside from your family home –  it is your biggest asset now, so I don’t know why you would be leaving something like that to chance.

Kate:

There does seem to be a bit of a mystique about Self-Managed Super Funds.  In your view, what are the benefits of having a SMSF?

Russell:

There are concessional tax breaks which are one of the biggerdrawcards of it, which have been specifically put in place as an incentive for people to save for their retirement,  so there is no reason why one shouldn’t be able to take advantage of it. Along with that does come an increased compliance burden….accounting and auditing requirements.  There are certainly advantages in setting one up and it does enable you to undertake certain strategies with benefits which would otherwise not be available outside of superannuation.  The caveat is that it is a complex regime so best to get professional advice before you embark upon it.

Nadine:

Is it possible to place residential property into a SMSF?

Russell:

Yes, but with several qualifications.  You can’t acquire residential property from a related party of the fund. That would encompass individuals or controlled entities like family trusts and companies, like that. Residential property, you can’t, but there are certain exceptions for what they call “business real property” which is really commercial property.

Nadine:

For example, a husband and wife cannot buy a real property together as their matrimonial home, buying it in the SMSF and live in it, for example.

Russell:

No, there is a rule called the Sole Purpose Test which says that you must run your SMSF for the sole purpose of providing retirement benefits, so whenever you are using an asset that is in the Super fund, you are getting a benefit before your retirement, essentially, if you are under 60 or not yet retired. That could result in breaches to the superannuation law. That would be a disaster – non-compliance. The ATO…..for the previous tax concession that you have got.  Buyer beware

Kate:

So with having the real property in the SMSF, is there any flexibility with respect for that, I mean, what are the implications of taking your property out of the SMSF?

Russell:

It depends on your situation – how old you are, whether you are in what they call retirement phase, so you have retired on one of the Commissions of Release, or whether you are under that age. Generally speaking what will happen is that the fund will transfer this real property to you and the fund will usually have to pay capital gains tax; the fund is eligible for what they call a Capital Gains Tax discount and over-riding this is if you are in retirement phase, then it is largely tax-free so once you distribute out an asset that is supporting a pension, it should be free from Capital Gains Tax. That is the income tax side of it, so then there are also the Stamp Duty issues with property and again, before you retire, if you are able to take it out, which is rare, but it can happen, then there would be stamp duty, broadly speaking.

Once you retire, there are some exemptions at least in foria, for getting property out of stamp duty, getting property out of the Super fund, to a member of the Super fund. There is also some Superannuation law compliance that you must cover off on when you are taking out the property, so that is in the general context.  But in the context of relationship breakdown, there are also some tax rollovers, so if you were to sort your assets, upon a relationship breakdown, from one SMSF to another that is usually a rollover.  There is also a standing prohibition on acquiring assets from related parties and transferring assets from one SMSF to another may breach that. But there is another exemption for that in the context of a relationship breakdown as well

Nadine:

In the event of a relationship breakdown, do you have any strategies that you would recommend to our listeners to put in place to protect their assets, in the actual event of a relationship breakdown?

Russell:

We often advise clients on asset protection strategies more broadly, so pre-relationship breakdown, and these might include ensuring that the assets are owned by the low-risk spouse, so what I mean by that is, often there is a high-risk spouse and a low-risk spouse. The high-risk spouse would be someone who may be an executor or director of a company who is broadly exposed to more risk.  So best practice would be to own the valuable assets in the name of the low-risk spouse, which is not always possible because some people may not have a partner or the partner may be foreign and it may be prohibitively expensive to …..the foreign or non-resident spouse.

Other things we do, in terms of asset protection, we ensure that control of family investment vehicles cease on bankruptcy or other defined events, and there is normally a suite of different strategies that work best in combination, for example –  now bringing in relationship breakdown. The proceeding that we have been discussing does not normally address family law risks, it normally discusses commercial high risks such as bankruptcy, insolvency, so we need to work closely with family lawyers, so we may use a Binding Financial Agreement together with these other things in order to have a really well-rounded asset protection strategy and cover off all of those risks.

Nadine:

Yes and we have quite a lot of information and material out there about Binding Financial Agreements for our listeners and the benefits of those, and at what point in time do they often kick in and so forth. So I think that is really good advice.  Often, Russell, in terms of advice from you, it would be getting it as early as possible and not necessarily just after the relationship has broken down; it is important to have this advice as early as possible.

Kate:

I agree, and being proactive early will avoid a lot of problems down the track.

Russell;

And with all of these asset protection-type strategies, the earlier you put them in place, the better they work, and the less likely would they be over-ruled or cancelled.

Kate:

There would not be a podcast that we have not mentioned this in, so you will note, this will not be any different!  I don’t think there is anyone out there who has not been affected by COVID; we have all suffered from the effects of COVID in different ways and our work has been affected.  How has the global pandemic affected your work?

Russell:

Well, with the nature of the work that I do mostly lends itself to operating remotely, though I do miss the social side of it, but I think we have managed to adapt quite well working remotely. We still catch up with clients and each other as much as we can, using Microsoft Teams or Zoom.  In terms of client work, I noticed that there was an initial trepidation with clients to start new projects or undertake new transactions that were not already in progress.  As we got more certainty, things seemed to get busy again, and it almost seemed that COVID was a bit of a wake-up call for some clients to get their personal affairs into some sort of order or restructure.  I think it was the combination of nothing else to do ….global crisis!

Nadine:

It is a reality check; we have just done a podcast with Rabia, from your office, in which we talked about the impact of Wills and Estates law as a result of COVID.  She was also saying that as a result of the health issues, people were wanting to push forward and either update wills or get a will.

Russell:

Same principle, I think.  Facing your own mortality, you start to do things that are important for you.

Nadine:

Have you changed the way in which you have been advising your clients to invest since the onset of the pandemic, earlier this year?  Is there anything in particular that you have seen or that you are advising, one way or another?

Russell:

I personally don’t advise clients to invest; that is something that Kirsty from our office would do, Kirsty who is one of our Morrows’ financial planners, she would do. They have a financial services licence which enables them to do this.  But one way that it has  changed my advice is that eligibility for tax concessions that I advise on depends on “small business” and what that really means is that the business is valued at less than a certain threshold amount and one thing I have been discussing with clients is: well, maybe check whether or not this valuation has dropped as a result of COVID, maybe the business has not been trading at all as a result of COVID, so perhaps you might have access to some of these small business concessions that you otherwise or previously would not, so that is one way of….getting advice.  More broadly, the government is putting in place lots of measures to stimulate the economy as a result of COVID and there are a number of ways in which you can take advantage of these things legitimately because that is what the government wants to entice you to do: they want to entice you to undertake transactions,  re-structure, buy assets; there’s lots of new measures out there, lots of new opportunities as a result of COVID which could be quite positive for you if you take advantage of them.

Nadine:

It’s been a good session today, thank you Russell, and we have expanded on what we talked about in our podcast with Kirsty about superannuation.  For all of our listeners, especially around these SMSF’s and the more complex issues that arise, it is invaluable to get advice from someone like yourself, and prior to setting them up and spending the money, it is important to know the tips and traps of a SMSF, because they are not straight-forward so it is really important to be informed.

Russell:

Agree, thank you both for having me.

Nadine:

Thank you for giving up your time, Russell, much good information has been discussed.

Russell:

And feel free to discuss any issues in the future.

Useful Links:

Morrows Private Wealth: 03 9690 5700 https://www.morrows.com.au/ 

Disclaimer: Nicholes Family Lawyers intends the information provided in this podcast as general information only, please contact Nicholes Family lawyers if you require specific information and advise in relation to any family law matter.