Superannuation and relationship breakdown

Gone are the times of matrimonial longevity. Instances of relationship breakdowns are far from uncommon, with the Australian Bureau of Statistics indicating that as many as one in three marriages end in divorce.

The division of assets is among the key issues needing to be addressed whenever a relationship breaks down, with superannuation one of the biggest assets of any long-term partnership.

Changes to the Family Law Act in 2002 and further amendments in 2005 have now accorded superannuation the same status as any other asset of a long-term partnership that can be split between individuals in the partnership. Now there are “splitting superannuation” laws which means to split a member’s superannuation benefit and allocate a certain portion of the benefit into the superannuation account of that member’s spouse, either within the same fund or rolled over into a newly nominated fund. The laws apply to married couples as well as de-facto couples, which includes same sex couples, in most states and territories.

Couples can work out what proportion of a superannuation interest will go to each person through a financial agreement if the relationship breakdown is amicable. If the breakup is acrimonious, however, and lawyers are involved, the Family Court has a four step process through which it will go when assessing any parties’ interest to the division of superannuation:

a) Ascertain and value the asset pool

b) Assess the contributions by both parties – both direct and indirect, financial and non-financial (contributions “made in the capacity of homemaker or parent” are always taken into account and it is immaterial if one partner was the sole financial contributor to the super fund)

c) Consider the future needs and income-earning abilities of both parties

d) After having considered steps 1-3, make orders which are fair and equitable.

Splitting superannuation does not convert it into a cash asset as it is still subject to superannuation laws – such as the fact that it is inaccessible until a person reaches preservation age.

In the event of any relationship breakdown and superannuation split, you need to obtain valuation information for your super benefit and decide on a method to split the superannuation – both of which we go into below.

STEP 1: OBTAIN VALUATION INFORMATION

The value of your superannuation is contingent upon the type of fund to which you belong. The table on the following page summarises how you obtain valuation information for each fund.

STEP 2: DECIDE THE METHOD OF SPLITTING

The options for splitting superannuation are to:

  • enter into a formal written agreement (a formal written agreement requires that both you and your partner instruct a lawyer who must sign a certificate stating that independent legal advice about the agreement has been given. If this agreement is made, you do not need to go to court but each person must retain a copy)
  • seek consent orders to split superannuation, or
  • seek a court order where agreement cannot be reached.

A splitting order divides a superannuation entitlement between a member and a non-member of the fund. There are three ways to split a superannuation interest, by specifying:

a) the base amount of the superannuation benefit which the non-member spouse will receive. The base amount is a dollar amount upon which the parties agree the non-member will receive from the member’s superannuation interest

b) a method by which a base amount can be calculated, or

c) a percentage which the non-member spouse will receive.

The most common splitting method is the base amount method. In a case where both husband and wife are working and have accrued their respective superannuation, one spouse will be the recipient of a superannuation benefit – thus according them the “non-member” spouse title.

Dividing the super fund can see one portion rolled over to another account in the same fund in the name of the “non-member spouse” or transferred into another fund altogether. The tax-free and taxable components are determined and proportionally split between the two. A roll over within the same fund will generally be tax-free to the fund. Anything that happens to the non-member spouse’s balance, like contributions, investment earnings and benefit payments, will be subject to the usual tax laws.

Investment earnings may be divided in the pre- retirement phase either as an agreed amount or percentage. Interests divided in the payment phase (when the member is a recipient of pension and an income stream has already commenced for the “member spouse”) are divided as a percentage of the regular pension payments. In most cases, the income stream will be stopped while the benefit is divided and recommenced under the new arrangements.

Alternatively, parties can defer their agreement about how a super interest is divided by “flagging” the super interest, preventing a trustee from making any payments out of it until the flag has been lifted. “Flagging” may occur because there is a case for maintaining the account and dividing it later, especially where doing so is likely to lead to greater growth of the final amount.

Splitting superannuation is complex, so be sure to consult this office on all matters pertaining to it in the unfortunate event of a relationship breakdown.

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Accumulation superannuation funds and defined benefit funds

In an accumulation fund (which is what many Australians belong to), the value of your benefit depends on:

  • how much money your employer contributes
  • how much extra you contribute
  • how much your fund earns from investing your super
  • the amount of fees charged, and
  • the investment option you may choose.

A defined benefit fund is infinitely more complicated but far less common. Each defined benefit fund can have its own set of unique provisions.

To value your benefit, you need to provide the following forms to the trustee of the superannuation fund:

  • Form 6 declaration, and
  • Superannuation Information Request Form.

The valuation of superannuation benefits can be complex and you may need legal advice.

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SMSFs and Small APRA funds (SAFs)

The value of a member’s benefit in an SMSF and SAF typically consists of the member’s account balance plus their share of any reserves.
The value of the assets is normally found in the financial statements of the SMSF or SAF. Members are required to revalue the assets each year to ensure the value of the assets reflect the current market value.

There are a range of potential matters that should be considered when valuing an SMSF or SAF, including:

  • the value of assets at the date of the cohabitation, separation and close to the court hearing, and
  • any tax implications that superannuation splitting may have upon a relationship breakdown.

When a spouse leaves an SMSF, administrative measures have to take place according to whether an individual or corporate trusteeship is being utilised:

  • individual trustees are required to amend the ownership of their investments by notifying all relevant share registries, banks and title offices and changing the names shown on the ownership documents such as a title deed. A transfer of numerous investments – particularly in real estate and shares – involves the transfer of the new titles for all assets and is likely to expend a significant amount of time, effort and money. Trustees must also prepare a deed of retirement for each outgoing trustee.
  • corporate trustees have to notify ASIC within 14 days of the change. Legal titles of all assets remain vested in the company which continues to act as a trustee.

SAFs are in a better position than SMSFs in the event of a relationship breakdown as members are not trustees of the fund so there is less red tape to adhere to. When a spouse leaves an SAF, a six-month grace period applies. The breathing space allows membership of the SAF to be reorganised.

Alternatively, spouses in an SMSF or SAF also have the option of staying in the fund. If they choose to split their superannuation at a later date, they will have to value the assets in their fund and decide on a method to split it, which we go into below.

SMSF and SAF assets are typically valued with the assistance of an expert such as an accountant. Consult this office.

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