Superannuation Splitting
under the Family Law Act
(updated
to 22 July 2009)
This
article is available in a convenient A5 sized booklet format for ready
reference. For copies ($25.00 inclustive of GST) see Mooreslegal Publications
This
article should be read in conjunction with Tax Issues in
Family Law Property settlements.
WARNING:This
paper is intended as a guide only to when further expert tax, accounting or
financial planning advice is needed. Every case is different, and different
fact situations can impact substantially on what otherwise might be a straight
forward case. It is trite to say that our tax laws are complex. As
indicated, what follows is designed to prompt you to take care in what you are
doing when you restructure your client's assets during a divorce.
Introduction
This
article gives examples of the impact of splitting superannuation, taking into
account taxation implications. The article should be of interest to Financial
Planners, Accountants and Family Lawyers. The astute litigant in person would
also gain some insight as to the financial planning opportunites
that may arise from their particular situation. Every person's superannuation
is different, as their ages, time of joining the fund. their
other financial resouces, and the circumstances
of their relationship casts a different slant on planning opportunities.
The
summary should be read in conjunction with the article Tax Issues in
Family Law Property settlements
Peter
Szabo
Moores Legal
July 2009
Objective of the Splitting Laws
Statutory formula:
The Difference Between
Hacking and Carving When Apportioning Superannuation
Tax planning opportunities
Splitting may not always be cost effective
Example 2
Separation Declaration
Cooperation of Parties needed
CGT issues
Particular circumstances Important
Overview
On
28 December 2002, laws came into operation
detailing how superannuation is treated when a marriage breaks down. The main
legislative changes occurred in the Family Law Act 1975. Additional legislation
also involved changes to the Family Law Regulations and to the SIS Regulations.
The
underlying theme of the laws is that superannuation benefits are treated as
property of the parties, to be divided between them in the same way as other
property is divided. Specifically the laws enable:
- superannuation interests to be valued
according to various pre-determined methods;
- the Family Court to make flagging orders
and splitting orders;
- the parties involved to make
superannuation agreements; and
- trustees of superannuation funds to be
bound by both Court Orders and superannuation agreements.
The Family Court retains its wide discretion when it
comes to applying the above rules. This means that if the strict application of
the
laws produces an
unfair result, the Court can decide upon a different outcome. This could
involve one party retaining the marital home for the benefit of the children,
with the other party receiving little or no cash payment. Instead, they will
retain their superannuation entitlements.
The
laws do not apply to cases where final property orders were made prior to 28
December 2002, unless those orders can be set aside, which can only be done in limited circumstances.
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The
laws were designed to provide clear guidelines to the Family Court so that
decisions are fairer, more practicable and more predictable. A summary of the provisions is as follows.
Statutory formula: A statutory formula, subject to limited
exceptions in the regulations, will apply for the valuation of interests in
each particular fund.
The formulae themselves are complex, but in most cases, particularly
accumulation funds, the result will be relatively straightforward. It may
simply be the value/amount from the requested statement from the trustee.
Complexities exist because of the many different funds in place, and the
peculiar difficulties of valuing, for example, defined benefits funds. With
those funds the formula can produce what appears to be an unfair result to the
non fund member spouse. Actuarial calculations may be necessary to demonstrate
this anomaly. It may be fairer to wait until the entitlement is paid, and then
to divide it between the parties. The benefit of this is that the exact amount
net of tax is known. Valuations are not mandatory if parties enter into a
superannuation agreement or if a member benefit statement is available for an
accumulation interest.
Splitting and flagging orders: The Family Court is able to make
flagging orders, or splitting orders dividing the funds between the member
spouse and non member spouse. A flagging order effectively directs a trustee
not to make a splittable payment without the
leave of the Court. A splitting order
will, in most cases, cure the problem of attempting to freeze funds for what
may be many years, and allow immediate financial separation. The new
superannuation entitlement (known as an "interest")
will belong to the other party who can then access it in accordance with
their own retirement qualifications (“conditions of release"). This
is in accordance with Government policy to ensure that parties have and retain
long term superannuation benefits.
A
flagging order is only obtainable where the court is satisfied that a splittable payment will soon become payable. As to how long
this means remains to be seen. By way of contrast, if the parties agree to flag
the fund in a superannuation agreement, no time limit is applicable.
Components of the split:
The various components of the particular interest will be split in the same
proportion, ie the preservation components, as
well as the different tax (ETP) components. Note that taxable and
non-taxable components are treated as one component for splitting purposes.
This can give rise to significant taxation consequences, some beneficial, some
not.
Parties
have flexibility: The parties can agree on how to
split funds any way they wish. They can agree to flag a fund or to split it,
depending on the
circumstances. These agreements are binding in the same way financial
agreements are binding on the parties and also on trustees of funds.
Some
super splits cannot be put in place immediately:
Some superannuation splits cannot be transferred into the non member spouse’s own name immediately. Whilst most funds can
immediately separate the member spouse’s
entitlement and rollover into an account in the non member’s
own name, some defined benefit funds can only “piggy back” the non member spouse’s entitlement to the member spouse’s
account. In these cases, the non member spouse has to wait until the member
qualifies for, and acts upon, that entitlement to be released before being
eligible to receive their entitlement under the superannuation split in their
own name. Careful attention needs to be given to these possible anomalies and
results.
Trustees
bound by orders: Trustees are bound by Family Court
orders, flagging agreements and superannuation agreements. Severe penalties for
breaching orders apply. Complex regulations governing the scheme are being
revised as anomolies arise and are rectified, in
an attempt to simplify procedures.
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Application of Superannuation
Splitting Laws
Parties are now better guided by the
statutory formula. Valuing an interest in a fund is not mandatory if parties
enter into a superannuation agreement. It is, however, mandatory for Court
purposes, unless it is an accumulation interest.Because
of the potential complexities that might arise, a valuation is strongly
recommended. Various organisations are available
to provide superannuation valuations. It is recommended that their services be
engaged for such purposes as they will be able to take into account the
complexities of the particular superannuation fund as well as the associated
tax aspects of the particular individual. Parties and their advisors can then
contemplate what options are available to them.
A splitting order divides a
superannuation entitlement between a member and a non-member. In order to be
split the superannuation will need to be
valued (see above). The valuation of the superannuation determines an amount
called the base amount. The base amount can be transferred as an interest split
or a payment split.
An interest split is where the
non-member receives a transfer of superannuation from their spouse. Generally,
a new account is established for the non-member's superannuation benefits. An
interest split can only occur when the superannuation is in a SIS regulated
accumulation style fund. This can be in either growth stage or payment
stage, eg an allocated pension. Each account can
then be managed in accordance with the member's financial wishes. The benefit
is that the new account will retain the preservation characteristics of the old
account, except that restricted non-preserved amounts generally become
preserved amounts. Interest splitting is generally not applicable to defined
benefit interests, non regulated superannuation
funds or AOF's.
An interest split allows an
immediate financial separation. It overcomes the problem of benefits being left
in limbo, possibly over many years, waiting to
be apportioned.
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Chris and Susie are divorced. Susie
has $224,000 in an accumulation fund while Chris has no superannuation. The
benefit is made up of $4,000 unrestricted non-preserved and $220,000 preserved.
The Family Court makes a splitting order that provides an interest split to
Chris of half of the superannuation benefit. Chris's $112,000 superannuation
benefit is now made up of $2,000 unrestricted non-preserved and $110,000
preserved. The unrestricted non-preserved benefit will remain unrestricted
unless the new fund has cashing restrictions, eg
if he rolled the funds into his employer fund which only allows funds to be
accessed if the member ceases employment with the employer.
Where the preserved part of the
account balance includes a non-concessional component (for
example contributions made without any tax deductions being available)
consideration should be given as to whether your client will benefit from such
a component.A client at age 55 accessing
superannuation by way of lump sum would not pay tax on the non-concessional
component but would pay tax on the concessional component.
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Defined
benefit funds or non-regulated (SIS) accumulation interests
A payment split will be made where
the superannuation entitlement is not eligible to be dealt with by an interest
split. An interest split will generally not take place if the superannuation
entitlement involves a defined benefit fund or non-regulated accumulation interest.
A payment split makes the transfer when the superannuation is able to be paid
out. Most defined benefit funds have changed their trust deeds to allow an
immediate payment split, ie a “clean break” for
the non member spouse.
A flagging order effectively directs
a trustee not to make any type of payment without the leave of the Court. As a
result the fund is frozen and cannot be
accessed by the member or trustee. This order may be used where a splitting
order (see above) is not appropriate. The analogy is similar to a caveat in
conveyancing parlance.
The parties can agree on how to
split benefits any way they wish. They can agree to flag a benefit or to split
it, depending on the circumstances.
Agreements are as binding as a Court Order. As such they are binding upon
trustees of superannuation funds.
To create a superannuation agreement
the parties must have received separate and independent legal advice. The
parties are also required to provide the
trustee of the superannuation fund/s with evidence of their separation. The ETP
components and the ESP of a new superannuation interest that is
created as a result of a splitting agreement will be treated in the same manner
as a splitting order from the Court.
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With the new regime, significant tax
planning strategies can be considered. These strategies, however, can only be
successfully implemented where the net tax consequences are carefully
considered, having regard to the particular circumstances of each case. This
applies with superannuation in particular, in that both the fund member and
non-member spouse's financial circumstances and tax positions are highly
relevant. The parties may decide to leave all superannuation with one party and
make an adjustment to the other in terms of the other assets, most likely the
former matrimonial home. Alternatively, they may divide superannuation on an
appropriate basis taking into account each of their (and any dependants)
different needs for readily realisable
assets.
Splitting
may not be cost effective
It may not be cost effective to
undertake a splitting order or agreement with small benefits, particularly if
the non-member spouse seeks to retain other
assets such as the family home. Consider whether all tax surcharge liabilities
are known, or can be estimated, and whether they have been debited against
the member's benefit. Otherwise, inequity may result as well as cash flow
difficulties to one of the parties. Weighed against this are benefits such as
the
creation of a totally separate fund for the non-member,
putting into place that individual's own conditions of release. The non-member
spouse also then has
the advantage of separate access to those funds in accordance with their own
conditions and particular circumstances, which is a
relevant consideration when determining a course of action in a particular
case.
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Example 2
- Planning opportunities
As your client moves closer to
retirement, consideration needs to be given to limits on lump sum contributions
to superannuation. Persons over 50 can contribute $50,000 per annum until 2012.
Persons under 50 are limited to lump sum contributions of $25,000 per annum.
Consider the following fact situation:
Tony and Meredith are divorcing.
Tony is 51 and Meredith is 47. Tony has superannuation valued at $600,000.
Meredith has a nominal superannuation fund.
Splitting Tony's fund equally means that
Meredith's receiving $300,000 overcomes the $25,000
annual limit.
Long term, Tony has more tax planning options
open to him within the superannuation environment than Meredith. This is more
the case where Tony earns considerably more than Meredith. Has this potential
been taken into account?
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Separation Declaration
Given the potential for tax minimisation, before making an agreement of above the tax
free threshold ($150,000 in 2009/10) the legislation requires the parties
to provide a declaration to the trustee of the fund that they have lived
separately for 12 months immediately before the declaration and there is no
reasonable likelihood of cohabitation being resumed. Alternatively, a Decree
Absolute evidencing their divorce is to be provided.
This requires cooperation between
the parties to determine whether the result is acceptable having regard to the
delayed payment. Sometimes the non-member spouse can take advantage of ESP
qualifications aggregating other funds, if they exist. There will be other tax
components and planning issues to consider in actual cases as against the
distilled example provided above, dependent on the amounts involved, the ages
of the parties, when they joined their respective funds and their requirement
for immediate funds. Clearly, the various permutations need to be considered to
ascertain the best option. For the non-member, it may in fact be better to
leave the interest with the member spouse, and to put in place a flagging
agreement, to take advantage of a better net result on the member's retirement
package when received. The member may prefer to split the interest, to take
advantage of the investment opportunities within the superannuation environment
without involving the other party.
Other planning strategies to be
implemented might, in the right circumstances, involve making a delayed payment
to take advantage of the
superannuation environment. For example, a spouse who is 52 years of age and
exiting a family business could agree to a delayed payment of their CGT-exempt
component until they reach 55, thus making it
possible to roll it over into a superannuation fund with more flexibility. As a
lump sum payment election has to be made within seven days of receipt of sale
proceeds, this strategy may be used to enhance planning options. Term payments
are possible, given that a CGT liability will usually not be triggered when
splitting benefits between the parties, provided assets are transferred to a
self-managed fund or a small APRA fund.
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With CGT, care must be taken to make
certain this is avoided. Expert advice in this regard is highly recommended,
particularly with funds holding
investment properties. Steps will have to be taken to separate the parties
financial ties within the fund and this will possibly involve the establishment
of another self-managed fund. CGT roll-over relief where applicable, is
available whether or not the apportionment takes place by Court Order or by
way of a superannuation agreement.
Special care needs to be taken with self managed superannuation funds
and how particular assets such as rental properties are apportioned. There may
be
issues of who gets control. Ideally one party ends up agreeing to roll over
assets into their own self managed fund. Once again, careful attention to
detail with
the assistance of expert advice is strongly recommended.
Particular circumstances important
The particular personal
circumstances of the case may determine a different course of action to just
splitting superannuation benefits. For example, a man
may have re-partnered. His new spouse is much younger, and they have a young
child. He may prefer to keep his benefits intact to maximise
pension
entitlements, which can be left to his new partner or other eligible
beneficiaries. This option is of course only possible if there is other
property
his first spouse can take to adequately compensate for this arrangement. Very
clear instructions will need to be given to the preparation of Court
Orders and agreements splitting superannuation. Otherwise, trustees of funds
will not be able to give proper effect to what the parties really want.
Aspects to consider when advising on
superannuation splitting necessitates a full understanding of superannuation
issues. The constant reminder is that superannuation, whilst treated as
property under the new Family Law regime, nonetheless has "strings
attached", more so as time passes given Government policy to enforce the
retention of superannuation benefits until retirement. Appropriate financial
planning advice is necessary to ensure parties do not fall into any traps. It
is an ever-changing, complex area. Specialist advice is essential to achieve
the desired and most advantageous outcome for the parties and their dependants.
For further information refer to Moores Training. The site, authored by Moores Legal
Principals Allan
Swan
and Jennifer
Dixon
contains a wealth of information on Estate planning issues including useful Pocket
Summaries
covering topics as diverse as the Small Business CGT Concessions, Child Support
Trust (generating excepted income) and Beneficiary Testamentary Trusts
© Peter Szabo 2009