Family Law Superannuation Splitting - Property In SMSF
- Arnold Shields
- Mar 30, 2011
- 4 min read
Updated: Jun 13
A Common Family Law Superannuation Splitting Problem
A common issue in Family Law Superannuation Splitting arises when a self managed superannuation fund (SMSF) holds illiquid assets—particularly business real property. One frequent scenario involves a husband and wife who co-own an SMSF that holds a commercial property, and they are now divorcing.
In this example, the SMSF owns:
A commercial property valued at $400,000
Cash holdings of $1,000
The property is leased to the husband’s business (operated through a company structure). Under the draft property orders, the super is to be split 50/50, and the wife intends to roll her entitlement into a fund of her choice.
The obvious dilemma? The SMSF does not have enough cash to transfer $200,000 to the wife without selling the commercial property. But selling the property would severely disrupt the husband’s business operations.
Why It's a Problem
It’s been common practice for small business owners to transfer their business premises into their SMSF for asset protection and tax planning reasons. However, this strategy can become problematic during a marital breakdown. In this case, the value of the asset is "trapped" in the fund, and accessing that equity without a sale becomes difficult—particularly as SMSFs cannot borrow against existing assets.
What the Husband Cannot Do
Superannuation law is clear:
The SIS Act prohibits SMSFs from borrowing money, except under limited exemptions.
The fund cannot borrow against the existing commercial property.
The SMSF cannot offer its property as security for a loan.
So, refinancing or leveraging the property within the fund to pay out the wife is off the table.
What the Husband Can Do
Here are five potential solutions:
Option 1: Make a Non-Concessional Contribution
If the husband is under 65, he can contribute up to $450,000 (using the bring-forward rule). A $200,000 non-concessional contribution would give the SMSF enough liquidity to pay out the wife.
No tax deduction is available for this contribution.
The SMSF won’t pay income tax on the contribution received.
The practical hurdle? The husband must find the cash—likely requiring a personal loan.
Option 2: Use Concessional Contributions via the Business
If the husband is over 50, his business could contribute $50,000 in concessional (pre-tax) contributions to the SMSF.
The business claims a tax deduction.
The contribution is taxed at 15% in the SMSF.
The balance ($150,000) would still need to come from non-concessional contributions.
This reduces the husband’s personal funding burden while benefiting from business tax deductions.
Option 3: Introduce a New SMSF Member
A new member could:
Roll over super from another fund, or
Make a contribution in cash.
The cash from the new member would be used to pay out the wife. In return, the new member receives an interest in the property.
Key risks:
Both parties must agree to admit the new member.
It may be hard to find someone willing to tie up their super in an illiquid, related-party asset.
Option 4: Sell the Property to a Trust Controlled by the Husband
The SMSF can sell the commercial property to a discretionary trust or unit trust controlled by the husband.
The trust can lease the property to the business.
This releases the cash for the SMSF to pay the wife.
Considerations:
Stamp duty and capital gains tax (CGT) apply.
Future asset protection is compromised—the property is now exposed to business risk.
Still a legitimate option in the right circumstances, but requires careful planning.
Option 5: Use a New SMSF with Limited Recourse Borrowing
This is the most complex and risky option.
The husband sets up a new SMSF.
The new SMSF buys the commercial property from the old SMSF using a limited recourse loan.
The old SMSF now has cash to pay out the wife.
The husband can roll over any remaining funds into the new SMSF to reduce the loan.
Because this is business real property, it's exempt from in-house asset rules. However:
The structure must comply with strict SIS regulations.
Errors can lead to non-compliance, penalties, and potentially losing the asset.
Don't Go It Alone
Each of these options comes with legal, tax, and compliance risks. Selling, contributing, or restructuring must be done with careful SMSF advice to avoid breaching the SIS Act, triggering tax consequences, or creating exposure to creditors.
At Dolman Bateman, we specialise in forensic accounting, superannuation disputes, and business structures. If you're dealing with a divorce and a complex SMSF asset split, get in touch with us before taking action.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
