Limited Recourse Borrowing Arrangements (LRBAs)
Where an SMSF holds real estate under a limited recourse borrowing arrangement (LRBA), further complexity arises. The asset is typically held via a holding (bare) trust, with borrowings secured only against that asset.
This structure affects property settlement in several ways:
- The available equity may be limited, particularly in the early stages of the loan, resulting in refinancing options being limited.
- The asset cannot be transferred without addressing lender requirements and the LRBA structure.
- Refinancing or restructuring is often required to facilitate any change in ownership.
In a Family Law context, these issues are often compounded by the need for cooperation between co-trustees. Where that cooperation has broken down, practical implementation can become difficult, even where there is agreement in principle.
Liquidity and Practical Constraints
Liquidity is often the central issue in SMSF matters. Where the fund’s primary asset is real estate (particularly where it is used as business premises for one of the parties), there may be insufficient available cash to fund a superannuation split.
This creates several practical challenges:
- A superannuation split may require the sale of the property, which may not be commercially desirable.
- Alternatively, other non-super assets may need to be adjusted to achieve an overall fair outcome.
- The party operating their business from the property may have a strong interest in retaining it.
A further issue arises where, as a result of these constraints, one party retains the SMSF asset (for example, business premises), and the other receives a greater proportion of non-super assets such as cash.
While this may appear favourable in the short term, it can create longer-term disadvantage. Cash does not carry the concessional tax treatment of superannuation, and the party receiving cash may face real difficulty rebuilding equivalent retirement savings in a tax-effective environment. Similarly, the party receiving the majority of their property settlement as superannuation can have difficulty re-establishing themselves due to limited cash assets.
These issues are often amplified in a Family Law context where there is dispute between co-trustees. A lack of agreement can prevent timely decisions regarding sale, refinancing or restructuring, effectively locking the parties into an impractical or unresolved situation.
Control and Trustee Issues
SMSFs raise significant issues of control. Following separation, it is generally inappropriate for former spouses to remain as co-trustees or co-directors of the corporate trustee.
Settlements therefore commonly address:
- Removal or replacement of trustees/directors.
- Transfer of control to one party or an independent trustee.
- Compliance with SIS requirements regarding fund structure.
Where control is not properly addressed, ongoing disputes can arise, including deadlock in decision-making, inability to implement investment strategies, and increased regulatory risk.
Valuation and Compliance
Accurate valuation of SMSF assets is essential. Real property, unlisted investments and related-party transactions must be properly assessed. In addition, any proposed division must comply with superannuation legislation, failing which the fund risks becoming non-compliant.
ATO compliance has become an increasingly relevant issue. In a family law context, compliance concerns are often brought into focus because the fund must be actively dealt with as part of the property settlement. This may require engagement with the ATO, including voluntary disclosure and rectification steps, particularly where historic non-compliance is identified. The consequences of non-compliance can be severe, including significant penalty tax.
Again, these risks are heightened where co-trustees are in dispute, as the ability to implement rectification strategies depends on cooperation and proper governance.
Why Specialist Advice Matters
SMSFs require a careful and strategic approach in a property settlement —particularly where LRBAs and illiquid assets are involved.
During Separation or Divorce these issues are often further complicated by the breakdown in the relationship between co-trustees. A well-structured outcome therefore requires not only technical understanding of Family Law, but also careful planning around control, implementation and dispute risk, to ensure that the settlement is both legally effective and practically workable.
