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Most of our readers would know someone who has gone through a relationship breakdown and divorce. These are typically stressful and emotional times where life-changing decisions need to be made around issues including parenting arrangements and the division of assets including the family home and bank accounts.
What can get lost in the early days of separation are the superannuation balances held by both members of the couple; an asset likely to be their most valuable outside the family home. Because our super accounts are locked away until retirement, they are often overlooked when couples divorce in favour of more readily accessible assets.
While that’s understandable, ignoring super can result in serious financial disadvantage in the long term, especially where one member of the couple has spent many years out of the workforce raising children or caring for family members, leaving them with significantly lower retirement savings held in super. According to an AMP-NATSEM study, divorced women with children had 37% less super than divorced dads from similar age groups and socio-economic backgrounds, and 68% less super than married mums.
Super is considered a marital asset, which means it can be divided between you and your partner if your marriage or de facto relationship breaks down and you permanently separate (including couples in same-sex relationships).
However, as super balances are held for our retirement and generally can’t be accessed earlier, specific rules need to be followed to ensure compliance with both Australian super legislation and family law. The upshot is that super balances are included in the combined wealth pool of separating couples but can’t be accessed as cash as they continue to be locked away for use in retirement and can only be withdrawn when we meet a condition of release.
Generally, you can access your super once you are:
- Aged over your preservation age and retiring. Your preservation age is between the ages of 55 and 60, depending on your date of birth
- Aged over your preservation age and starting a transition-to-retirement income stream (TRIS)
- Aged over 60 and ceasing an employment arrangement
- Aged 65 or over.
You can only tap into your super before reaching your preservation age in limited circumstances, such as if you’re experiencing severe financial hardship.
What happens to super benefits in the event of a divorce?
The treatment of super assets in a divorce will depend on whether or not you have met a condition of release (see above).
If you can’t access your super yet
If you are at a stage in life where you can’t yet access your super, then your balance will either be:
- Flagged so that the actual splitting of member balances is processed when you do meet a condition of release. This is usually the case where benefits are held in a defined benefits fund or similar; or
- The split will be processed now to transfer the agreed amount to your spouse’s nominated super account.
Either way, if you and your partner can agree to terms then a formal written agreement about how your super will be split can be prepared and carried out. This formal agreement needs to be prepared by a lawyer who must certify that both of you have received independent legal advice about it. This agreement is then used to obtain a consent order from the Family Court to split your and your partner’s super accordingly. You won’t be required to attend court if you’re applying for a consent order.
If you and your partner can’t agree on how to split your super, you can seek a court order from the Family Court to make the decision on your behalf. Under the provisions of the Family Law Act, a court must be satisfied that any super split is just and equitable for both partners. You will be required to attend court if you’re seeking a court order.
Whichever method you use to split your super (mutual agreement, consent order or court order), the trustees of your super fund (including those of self-managed super funds) will be bound by the payment terms of the order.
If you can access your super
If you have met a condition of release and can access your super, a mutual agreement or court order can be arranged to facilitate the splitting of your or your partner’s funds immediately (including any super pensions that you may be receiving).
Once again, the trustees of your super funds are legally bound by the payment terms of the agreement or court order.
There are four steps you need to follow to split super.
Obtain a current valuation of your and your partner’s super. You are legally entitled to obtain your partner’s super information from the trustees of their fund/s. To do this, you need to provide your partner’s funds with three of the four forms that are available for free download in the Superannuation Information Kit at the Family Court of Australia’s website. The third form will differ depending on whether your partner has an SMSF or is a member of an APRA-regulated fund.
Some super funds may charge for this information.
If you’re seeking a court order about your partner’s super, you must inform their super trustee/s accordingly. This provides your partner’s trustee/s with an opportunity to attend the court hearing and object to the order if they deem it necessary.
File an initiating application online with the Family Court, along with a financial statement and affidavit. The Family Court requires this information to grant your consent order (if you have come to a mutual agreement with your partner) or a court order (if you haven’t reached a mutual agreement).
Once you have filed your documentation with the Family Court, your partner will need to provide a response to your initiating application, along with their own financial statement and affidavit.
Once your Family Court consent order or court order has been issued, you should provide the trustees of your super fund/s with a sealed copy of the order as soon as possible (if it will affect your payment arrangements when you have met a condition of release).
At a time when you already have so much to deal with, it may be worthwhile getting legal assistance to help you complete these steps.
If you or your partner are in a self-managed super fund (SMSF), then there are several issues that need to be considered in addition to those already mentioned.
1. You must continue to meet your obligations as a trustee!
Separation has no impact on the ongoing obligations of the fund’s trustees: you are still required to act in the interests of all members of the fund. This often creates further issues and tension as joint decisions will need to be made.
You are responsible for all aspects of the fund and there are strong penalties for SMSFs that do not comply with superannuation laws, for example, by accessing super money without meeting a legitimate condition of release.
For these reasons, what tends to happen is that one member of the couple leaves the SMSF or has the fund wound up. More on this shortly.
2. Valuation of members interests in the SMSF
Valuing the members balances in the fund first requires the fund assets to be valued, and this will be needed as part of the splitting and separation process.
Valuing the fund’s assets may best be carried out by an external party (arranged by the fund’s accountant for example). You may not have the financial expertise to make accurate fund valuations and in any case, an independent valuation could prove more amicable.
Although it is usually recommended to use external parties to arrive at the current value of the SMSF’s assets, it is still a responsibility imposed on the fund’s trustees.
3. Who gets what?
The process of dividing the assets in an SMSF is often complex given the personal dynamic of the fund’s trustees and members.
Any agreement should include the division of the fund’s specific assets; deciding who keeps what asset in the fund or if it is better that the fund’s assets be sold, and the resulting cash being split as per the financial agreement.
It is extremely important to seek tax advice on this, especially for couples close to retirement age. The delay in the sale of fund assets to a time where all the fund’s income, including capital gains tax, is tax free can prove beneficial for both parties.
4. What will happen with the SMSF?
In most cases, a clean break works best, so one member of the couple would usually leave the SMSF or have the SMSF wound up. Please get tax advice first!
This then creates a series of administration requirements. Read more about what to do if a member wants to leave an SMSF.
Once again, it’s important to note that for the period you remain as a trustee of the SMSF, you are responsible for all aspects of the fund.
5. Tax considerations
It’s wise to seek tax advice before signing off on any super splitting arrangement as the tax implications can vary considerably, depending on your personal circumstances.
In the accumulation phase, capital gains tax (CGT) may apply if the assets need to be sold to fund a payment out of the fund or if there’s a full wind up. The amount will be 15% of the gain with a 33.33% discount applied for assets held for more than 12 months, bringing it down to 10%.
This will impact the benefits of both members as the fund will need to factor in the tax prior to paying benefits out of the SMSF.
Members close to retirement can benefit from the CGT exemption that is available for assets in retirement phase.
Timing is key here so members should be sure to explore options for the most tax-effective time to sell assets before they act.
If the members of the fund are close to preservation age, then there may be significant tax advantage on agreeing to delay the sale of any SMSF assets until the members are able to move the funds into retirement phase to access the CGT exemption.
Another tricky situation to navigate is existing relationships with financial advisers and accountants. In many cases it may not be feasible for both spouses to remain as clients of the same advisers. Decisions will need to be made as to who retains the relationship and if a new, neutral adviser is required for ongoing advice and services that are joint in nature.
Divorce proceedings can drag on and stretch across multiple financial years. But ongoing administration still needs to be done, so deciding who the fund will engage should not be deferred until settlement.
There are many factors that need to be carefully considered by SMSF trustees during a divorce. All parties must ensure they follow the letter of the law or there can be serious consequences that can ultimately affect the wealth of both parties at a very difficult time. Obtaining clear, impartial advice is key.
Splitting super when there is a relationship breakdown is an increasingly important financial decision for both partners. For most people, it will be necessary to seek independent professional advice based on your individual circumstances and needs.
The information contained in this article is general in nature.