New Superannuation Laws

Super splitting on marriage breakdown

December, 2002, By Stephen Bourke, CCH ( A publisher of legal content for the legal profession)

New laws to allow for the splitting of superannuation on marriage breakdown will commence on 28 December 2002. The issue has been on the agenda for a considerable period of time and it is now certain it will happen. Financial planners will need to become familiar with the new scheme so that they can properly advise their clients about ALL aspects of superannuation and especially so their clients can take full advantage of the tax arrangements under the new super splitting laws.

Overview of the new rules

The new super splitting laws create new options for separating / divorcing parties by treating superannuation as property, ie in the same way as other assets (house, shares, etc). The new rules allow for the division of superannuation either by court (property) order or by agreement between the two parties.

Court orders

Courts that operate in this area of the law (typically the Family Court or the new Federal Magistrates Court) will be given two new powers:

the power to make a splitting order; and

the power to make a flagging order.

Splitting orders

A splitting order, as the name implies, will enable the Court to split superannuation. To do this the Court is first required to value the superannuation and secondly to allocate an amount out of that value to the non-member spouse. These two steps are explained below.

Valuation of superannuation will depend on the type of interest* and whether it is in the growth phase or the payment phase. Accumulation interests are valued by reference to the withdrawal value. There can be instances where valuation of the interest at an earlier point in time might be necessary, such as the date of separation, but generally the withdrawal value is used.

Defined benefit interests are valued by reference to a prescribed actuarial formula which takes the accrued benefit multiple and the salary and then applies a valuation factor from a set of tables published in the Family Law (Superannuation) Regulations 2001. Where the superannuation is paid as a pension, a different formula is applied but essentially it will derive a lump sum value in today's dollars required to meet the pension payments over the life expectancy of the member.

* Generally refers to the superannuation benefit in question.

Allocating an amount to the non-member spouse is the second requirement for the Court to do before making a splitting order. This amount is called the "base amount". The base amount is a central concept in the new laws because it will determine the amount that is to be transferred to the non-member. Transfers can happen in one of two ways:

payment splitting under the Family Law Act and Regulations; or

interest splitting under the Superannuation Industry (Supervision) Regulations.

Payment splitting will apply to all interests, unless the trustee triggers an interest split under the SIS law. Payment splitting operates to split superannuation only when a payment of superannuation is made. The complexity of this is immediately obvious — payment may be many years away. In addition, there is a range of technical rules about what can and cannot be split. Therefore why have payment splitting? The reason is because the SIS law, while covering most superannuation, is not comprehensive and thus payment splitting exists as an option when the SIS law does not operate.

Interest splitting is available to regulated funds where the interest is an accumulation interest in the growth phase or it is an allocated pension. It is not available for defined benefit interests. Interest splitting enables the creation of a new interest or a rollover, the value being the base amount allocated by the Court. Because interest splitting applies to the most common interest (a regulated accumulation interest), it is expected that most funds will use this option.

When superannuation is in the payment phase, the new super splitting laws require that the income stream be given a capital value. However, what will most commonly occur is that the Court will split the income stream by reference to a percentage. There are, of course, social security implications for splitting income streams but the consequential amendments to the Social Security Act and the Veterans' Entitlements Act have not been made.

Flagging orders

The other type of order that a court will be able to make is what is termed a flagging order. These are orders which, as the name implies, place a flag on the superannuation account. When a flag is in place, it prevents the trustee from paying out superannuation until the flag is lifted. These will most likely be used when the member is near retirement and the superannuation is about to be released. It avoids the complexity of actuarial valuation so close to release of superannuation.

Superannuation Agreements

There are mirror provisions under the new law to enable couples to split or flag superannuation by using a superannuation agreement rather than seeking a court order. Thus, outcomes that can be achieved by court order can also be achieved by superannuation agreement. There are, however, some differences in the procedures between court orders and superannuation agreements.

Firstly, before making a superannuation agreement, the parties have to receive separate and independent legal advice. There are also requirements that it be in writing and be properly witnessed.

Secondly, the mandatory valuation requirements do not apply to superannuation agreements. This is important since the mandatory requirements are not specific to the member and have no regard to the personal circumstances of the member. Where a valuation that takes account of the personal circumstances of the member is desired, use of a superannuation agreement may be an option.

Thirdly, the parties are required to serve on the trustee a copy of the divorce certificate (called the decree absolute) at the same time as the superannuation agreement. If the couple has not taken the formal step of becoming divorced (and not everyone does), then they must make a separation declaration stating that they have separated. Where the value of the superannuation is greater than the ETP threshold ($112,405 for 2002/03), the declaration must state that they have lived separately and apart for twelve months and there is no reasonable likelihood of cohabitation. This is essentially a revenue protection measure and there are penalties for false declarations (up to twelve months' imprisonment). However, it should be noted that the declaration requirements do not apply to court ordered splitting.

De facto couples

De facto couples are excluded from the new regime. This is because property settlements arising out of the separation of a de facto couple are governed by state and territory law, not Commonwealth law. In other words, the Family Law Act does not apply to the property of de facto couples. This can be cured by each state referring the law making power over the property of de facto couples to the Commonwealth and successive Attorneys-General, both Liberal and Labor, have asked the states for this power. However, it has not been forthcoming and is currently before the Standing Committee of Attorneys-General. Until the power is referred, a couple will at some stage have to have been married for the new law to apply to their superannuation.

What advice should be given now?

An important point to be aware of is that the new laws are not retrospective. This means that property settlements entered into prior to 28 December 2002 will be treated under the current laws, ie superannuation will not be treated as property and as such cannot be flagged or split. This will be a consideration for clients who are in the process of a separation or divorce, whether they should settle before or after the new laws come into effect.

Clients will want to know what the options are given the advent of the new super splitting laws. The new laws say that if the Court has issued a property order that is not an interim order, then you cannot split superannuation. In other words, the new laws will be available where the Court has not issued a property order — or if it has issued a property order, it is what is termed an interim order. An interim order is a particular type of property order and technical term under the Family Law Act. Legal advice is recommended if this course of action is to be followed.

Planning tips

A more difficult question — to split or not to split — will depend on the circumstances of your client. There are tax considerations to be weighed before advising whether your client considers taking advantage of the new law.

For example, under the new law, eligible termination payments that are split by court order or agreement are separately reported to the Tax Office. This opens up a number of possibilities in solving an excessive component problem for a divorced or separated couple. Take the situation of a husband retiring with an ETP of $750,000. This is in excess of the lump sum RBL ($562,195 for 2002/03). Under the Family Law Act as it currently stands, the ETP cannot be split and the member may have to transfer other property to his wife in satisfaction of the property settlement. He is left with an excessive component problem. Of course, he may attempt to bring himself within the higher pension RBL ($1,124,384 for 2002/03) but the new super splitting laws open other possibilities. He may transfer part of his ETP to his former wife and bring himself within the lump sum RBL. The payment to the wife is separately reported and it will be taxed as a separate payment in her hands (including a new low rate ETP threshold — $112,405 for 2002/03).

An alternative consideration is the eligible service period. The new super splitting laws set the ESP at zero. On the face of it, this may seem a rather severe outcome. However, consider the situation where your client is a person who may have a small amount of superannuation in her own name (it is usually the wife) and this was acquired early in the marriage ie pre July 1983. Accepting a proportion of the husband's superannuation may provide generous increase in the pre July 1983 component enabling advantage to be taken of the considerable tax concessions of that component.

The super splitting laws are an important change on the financial and estate planning horizon. Financial planners should become familiar with the new laws to offer the best advice to clients. Further information and planning strategies can be found in the CCH book, Super Splitting on Marriage Breakdown or at www.supersplitting.com.au.

Stephen Bourke is a private legal practitioner and Managing Director of Supersplitting Pty Ltd. Stephen was the legal officer primarily responsible for advising the Government on the new super splitting laws and bringing the Family Law Legislation Amendment (Superannuation) Act 2001 into existence. This article draws from the new CCH book, Super Splitting on Marriage Breakdown, which was written by Stephen Bourke, Gary Watts and Michael Taussig QC.

The financial planning implications of family breakdown are also covered in CCH's Australian Master Financial Planning Guide 2002/3.

This article is available in the CCH webpage www.cch.com.au/fe_splitting_super.asp