How to minimise the impact of marriage breakdown on your business
Monday, October 6, 2014/
A sad reality is that thousands of husbands and wives owning an SME face the risk that their marriages may one day fail, with potentially devastating consequences for their personal lives, their personal finances and their businesses.
Self-managed super funds are often at the core of SME owners’ personal finances, including ownership of the business premises. And often SMSFs provide the key to keeping a once family business operating in the face of a marriage breakdown.
Consider a few statistics. The latest-available ABS divorce data suggests that more than 40% of marriages fail. The latest Australian Family & Private Business Survey, conducted by RMIT University, reports that spouses are involved in more than a third of family-owned businesses.
In practice, the level of involvement of both spouses in family businesses is probably even higher than reflected in surveys. “It is very uncommon for a spouse to be totally excluded from a small business,” says Sue Prestney, a partner at PwC Private Clients.
SmartCompany asked Stephen Bourke, a family lawyer and specialist in the division of super savings following a marriage breakdown, about how couples can minimise the impact of separation on their business. In turn, the continuing success of a business will potentially leave more wealth to split.
Bourke is a director of Certus Law in Canberra and its affiliated consultancy, SuperSplitting.
1. Keep the business intact
Bourke says it usually “makes sense” for the spouse who had been running the family business on a daily basis to negotiate to acquire full ownership.
This would often involve the spouse who will become sole owner of the business transferring a larger share of his super and non-super assets to the former spouse as part of their property settlement.
The settlement, says Bourke, should recognise the need to keep the business operating while reflecting its proper value when dividing a couple’s assets.
“The breakdown of a relationship has enormous economic consequences,” he adds. “And to minimise that, couples should try to ensure that the business remains a viable entity.”
2. Try not to lose control of the business premises
This comment is directed at the many SME owners who hold their business premises in husband-and-wife self-managed funds.
Bourke says small businesses often rely on their business premises remaining in the principal’s SMSF in order to keep operating as efficiently as possible.
Typically, the spouse who is severing his or her ties with the business would receive other matrimonial assets, excluding the business premises, as part of the property settlement.
This is, of course, not always achievable given the business premises commonly represent a large proportion of a separating couple’s assets. (See next point for some ideas.)
3. Think creatively
Separating couples, their legal advisers and, on occasions, their business partners sometimes have to think creatively when trying to keep a business and its business premises together.
Bourke recently advised the three business partners of an architectural practice following the breakdown of one partner’s marriage.
Each of the business partners held a $330,000 share in an SMSF; its sole asset being their business premises valued at approximately $1 million. (None of their spouses were members of their super fund.)
As part of his property settlement, the partner whose marriage had failed agreed to pay his former spouse $200,000.
Bourke suggested an arrangement to prevent the forced sale of the business premises as a result of the marriage breakdown.
Under the arrangement, two of the business partners each made additional $100,000 contributions into the SMSF. This increased their individual share of the SMSF to $430,000 – and the total asset value of the fund to $1.19 million.
Then the business partner whose marriage had broken up transferred $200,000 from his share in the fund to his former spouse’s super fund in accordance with the property settlement. This reduced his share in the fund to $130,000 but meant the business premises did not have to be sold to raise cash for the property settlement and their architectural practice was able to keep operating without interruption.
4. Think even more creatively
Bourke says other measures to prevent the forced sale of business premises following the breakdown of a business couple’s marriage include the use of a tenancy-in-common arrangement.
Take the example of business premises that had been held in a couple’s SMSF during their marriage. Both spouses are very involved in the business – even after the failure of their marriage.
Under their property settlement, ownership of the business premises was effectively split in two with the SMSFs of each former spouse holding a 50% share in the business premises as tenants-in-common.
In other words, ownership of the business premises was transferred out of what had been their joint SMSF into separate SMSFs. The rollover provisions in tax law mean that the transaction was not subject to CGT.
Some separating couples use unit trusts with units held by their respective SMSFs to achieve the same purpose.
5. Aim to keep the courts out of the settlement
Bourke says couples should try to reach an agreed settlement, using skilled advisers to minimise the cost of a marriage breakdown.
“The worst thing they can do is to become involved in legal proceedings,” he emphasises. “Court action can take a long time to resolve and that will be a real detriment to the on-going viability of any business.”
And by keeping control of their property settlement, separating couples can come up with their own creative solutions. For instance, Bourke says the Family Court would never have made an order to hold 50% stakes in the business premises as tenants-in-common separate SMSFs (discussed in point four).
“The key is that couples have the choice of getting someone else to make a decision about your life, that is, a judge, or making the decisions themselves,” Bourke says.