SMSF - what happens when one member wants to leave

Assume a 2 member SMSF with a corporate trustee and both members started off with different balances and kept putting in compulsory employer contributions. A few years down the road, if one members wants to leave (separation for example). How is their share calculated? Based on starting balance + crediting rates + regular contributions?

 

Hi @JohnPropChat

A good question and it makes it clear you're putting the appropriate amount of thought into how SMSFs work.

I can tell you how this works from the perspective of what I see in my own SMSF.

At financial year end, the SMSF accountant performs the tax year-end tax return and audit for the SMSF. As part of his/her report, a "Balance Sheet" is created and the "account balance" for each member is noted in the Liabilities section of the Balance Sheet. If members have contributed different amounts, their member account balances would be different and noted as such in this section.

If a member wanted to leave, the SMSF accountant would need to determine precisely the account balance of that member as at that time, and advise on whether any of the SMSF assets could be transferred to their new SMSF, or whether SMSF assets would have to be liquidated into cash (ie sold) to enable payout of this member.

Hope this helps, and I'm sure the accountant members of the forums will comment further.

 

Unlike a retail or industry fund, due to the limited number of members (about 4 IIRC), SMSF would have more necessity to liquidate investments in order to pay out a leaving member unless they had an immediate replacement eg: one member leaves and new one commences with similar or greater amount rolled into the SMSF. If there is no replacement, then assets will need to be liquidated, capital gains accounted for etc - a process which may take many months if the assets are property in hard to sell areas and much easier if it is shares/bonds/cash.

 

Yep it is a mess. I have a friend who got divorced and they had SMSF with property, shares and a fair whack of cash.

Cost a fortune in legal fees and took over 3 years for it to all be sorted. They had to liquidate the properties which was what took most of the time . Very very stressful time. The property settlement could not finalise until the SMSF mess had finished.

 

The member balance of the person leaving would need to be rolled over to the new superfund. Divorce may change things as it may not be just the member balance due to the property settlement between the parties it could be more or less.

 

Indeed, divorce can wreak havoc. Came across this document on super splitting - https://www.ag.gov.au/FamiliesAndMa...tion splitting frequently asked questions.pdf

Which suggests that such a splitting agreement can be binding - wonder if family court can throw this out just like other financial binding agreements?

How is the balance calculated though - surely it's not just money-in. When it was contributed and fund's performance have an affect?

 

Hey there -

Sadly a regular story at the moment - in the event of separation / divorce you can have a court order or binding financial agreement to allocate each members share - this will also be covered in the Trust Deed - our deeds have a family law section which specifically covers this. In the event it is during the year you need to do 'interim accounts' at the specific date to include contributions during the year and calculated the member balance at that date. Of course, you may or not seek legal advice - depending how nasty the situation is - if amicable - I request a binding financial arrangement to perform the task and its done, you know how much $$ you have and how much the other party has. Of course there are a few other matters, for example the other member must resign as a member of the fund by deed and a form 484 must be prepared to resign as director of the fund. With the right help this can be done easily - as many in this situation have enough stress going through the process.

Note - both parties sign the resignation.

Cheers Ivan

 

Binding financial agreements can cover super and these are generally binding provided the family law act rules are adhered to and contract law is complied with - no undue influence etc