Key Considerations when faced with the question of Super and Divorce
With the increasing emphasis on superannuation as the main retirement savings vehicle, it is quite likely that in the not too distant future, superannuation benefit may surpass the main home as a major asset. Add to the mix the fact that nearly 30% of marriages end in divorce and it is easy to see that advice is required on how best to deal with superannuation and divorce.
With the exception of WA, the superannuation splitting laws generally also apply to de facto couples including same sex couples.
It is not necessary to go through the court system, and in most cases, if possible, it is better and cheaper if the couple can come to a mutual agreement. If this is not possible, the court will consider the following factors:
- Identifies and values all the assets and liabilities of the couple;
- Assesses the contribution each partner has made towards the total wealth. The contribution is not based only on monetary factors, but rather the court endeavors to take into account activities such as child rearing and home making;
- It looks into the future and considers any disparity in each partner’s financial situation. For example, one may have been out of the workforce for a number of years with family commitments while the other has a higher earning capacity. How this may impact on the future living standards of the parties is also considered and the court will make adjustments for this as it feels is justified.
- Finally there is to check to see if the final result, in the courts view, is “fair”.
From the legal perspective, the spouse with the superannuation benefit to be split is known as the “member-spouse”. The spouse receiving the split is known as the “non-member spouse”. A trustee is required to provide certain information about the member benefit to either the member or the spouse for these purposes.
With a few minor exceptions (such as low account balances or pensions) most super member balances are splittable. The actual splitting process can be achieved in 3 possible ways:
- Formal written agreement. Generally, this still requires both parties to seek independent legal advice but does not need to go before a court;
- Consent Orders from a court – this is where the couple agree on a split, document it and have it formalized and made binding by applying for Consent Orders through the Family Court of Australia. This can be lodged electronically without having to attend court;
- Where no agreement can be reached, the court will decide and issue the appropriate orders.
Binding Financial Agreements (BFA)’s) can be useful and can be established prior (pre-nuptial) or during a relationship or even after the break-up. The Family Law Act does provide certain guidelines on what is required for a BFA to be effective, but be aware that they can be overturned by the Family Law Court.
Eventually, most benefit’s will need to be split. There are two methods of splitting super benefits:
- An interest split – where the super account is divided by specifying the dollar amount to be paid to the non-member spouse. This is generally used where the benefit is in accumulation mode or capable of being rolled back from a pension to accumulation; or
- A payment split – where the super pension payment is split between the couple. This is most often used in the case of defined benefit or non commutable pensions.
Where mutual agreement cannot be found, it goes to the court. Generally, the court will make either:
- A splitting order – where it specifies the way in which the super benefit is to be divided; or
- A flagging order – this prevents the trustee from paying out that part of a member-spouse’s splittable interest until either the parties enter into a written agreement or the Family Court makes an order that the trustees can pay out the benefit. Flagging orders are most commonly used when the member-spouse is close to being to access the benefit or it is difficult to determine the value of the benefit at the time the order is made.
Where the court makes a splitting order, it will normally make either a “base amount split” or a “percentage split”.
A base amount split is where the non-member spouse is entitled to a specific monetary amount. There is often an adjustment clause to ensure the trustee adjusts for the performance of the fund – either positive or negative – from the time the order is made to the time the payment is made.
A percentage split is an order where the non member spouse is entitled to a specific percentage of the splittable payment. There is no adjustment clause for a percentage split order as this should be reflected in the valuation of the fund at the time the payment is made.
Once the split has been agreed upon, the non-member spouse’s entitlement needs to be transferred within certain time frames as dictated by the legislation. Essentially there are (at least) four methods of payment to the non-member spouse:
- Rollover the non-member spouse benefit to an existing superannuation account in their name;
- Create a new member account in the existing fund in the non-member spouse’s name. They will be treated as a separate member in their own right from that point forward. While this option is acceptable in retail type funds, it can be problematic for SMSF’s as:
- Separating spouses usually like to separate their affairs;
- Trustee issues – making on going investment and management decisions in a rational manner may prove difficult for (now) ex-spouses;
- Failure to meet the member/trustee fiduciary rules and administrative responsibilities can result in significant penalties or even a non compliance order.
- Rollover the money to a different fund (including another self managed fund) – probably the most popular option as it satisfies the emotional need of separation of financial affairs;
- Payment of a lump sum payment out of the super system – this option is only possible where the non-member spouse has satisfied a condition of release or the member-spouse’s benefit consists only of the accessible unrestricted non preserved benefits component.
Tax implications are always important. Where the non-member spouse elects to start a new superannuation account or has the money rolled over to another fund, there are no immediate personal tax consequences as the transaction is simply treated as a normal super rollover.
Tax free and taxable proportions will carry across to the non-member spouse’s entitlement in the same proportions as the member spouse’s original benefit as will any accessible unrestricted non-preserved amounts. All other amounts are preserved in the normal manner.
There may be some special capital gains tax relief available where the transfers involve SMSF’s and it is strongly suggested to seek professional financial and accounting advice in these cases.
Where the non-member spouse is requesting and receiving an immediate lump sum because they satisfy a condition of release (such as retirement or age 65), the payment will be subject to the normal superannuation lump sum tax rules and any tax will be payable by the non-member spouse.
Relationship breakdowns can be stressful and emotionally difficult times for those going through them. Under these conditions, it is easy for poor financial decisions to be made either out of lack of attention and understanding or sometimes out of spite. This is why it is very important to seek professional financial and tax advice from a suitably qualified specialist before making any irreversible decisions.
Please note this information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial advisor, whether the information is appropriate in light of your particular needs and circumstances.
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