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