Separation/Divorce Splitting Super

1. Introduction
2. How the Super is Split
3. Strategies to consider in a Relationship Breakdown

Introduction

The rules relating to the splitting of superannuation entitlements need to accommodate the family law. The important considerations of the family law act to note is:

• family law act is different in each state.
• superannuation is considered to be ‘property’. The family law act regards Property as divisible among the parties on a relationship breakdown.
• superannuation entitlements differ between each state
• Binding Financial Agreements (“BFA’s”) are increasing in popularity to provide guidance on asset splits in the event of a relationship breakdown and so as to avoid a court order.

Accordingly superannuation entitlements applies to:

• Marriages
• De facto relationships – except in WA where superannuation interests are treated as a resource not a splittable superannuation interest. By resource we mean it is an amount that has value to one or more of the parties and is counted towards calculating the division of assets, but is not counted as assets that can be split between the parties
• hetrosexual couples (de facto relationships & married)
• same sex de facto relationships

There two methods of splitting superannuation interests these are (1) payment split (which continues to require a condition of release) and (2) a interest split. The most common by far is the interest split approach.

How the Super is Split

Where the parties do not have a BFA and where the parties cannot amicably settle out of court, then the only way of arriving at a settlement is by court order. There are two main types of court order (1) Flagging order and (2) splittable order

Flagging Order – means the court freezes the superfund and the trustee’s powers until some future event, eg the retirement of a member with a defined benefit interest. This order is rarely issued.

Splitting Order – is much more common and more flexible enabling the trustee to negotiate a suitable settlement. The two common splitting orders are:

• Base amount split – the non member spouse is paid a fixed amount; and
• percentage split – the non member spouse is entitled to a percentage amount of the splittable payment

BFA’s – can specify how the super will be split and therefore avoid any dispute. BFA’s can be entered into before during or after a relationship. The family law act recognises BFA’s and prescribes how they must be executed.

Paying the super – Div7A of the reg’s prescribes that the payment can be made in one of three ways:

• A new superannuaton interest in the fund – this option is not recommended in a SMSF, unless there are reasons that could cause a decrease in the non members interest in the event of cashing in their interest due to liquidity issues within the fund. This could occur if a property was held within the fund and the market was in a slump. However a strategy to overcome this liquidity constraint is if the continuing member can finance the acquisition of the property through a new SMSF. This would be possible for business real property or residential property as related party transactions are allowed as part of a marriage breakdown (Schedule 3 Super Legislation Amendment Act).
• Rollover into a different fund – a popular approach
• lump sum payment – only possible if a condition of release has been satisfied.

Tax consequences – (1) Income Tax – there are no consequences from splitting, often simply a new superannuation interest is created; and (2) Capital Gains Tax – there can be consequences where assets are transferred out of the super interest into the non members interest, however CGT rollover concessions can apply to defer the CGT on disposal. For example if a SMSF owns a property and the SMSF transfers a 50% tenants in common interest to a new SMSF in which the non member becomes a member a capital gain may arise. A CGT same asset rollover relief would apply to effectively disregard the gain.

Strategies to consider in a Relationship Breakdown

• Upward trending or peaking market – Use Base Amount Strategy for splitting the super – don’t opt for a base amount if the super interest is at a low, otherwise you are cashing in the interest at the low point. Conversely the base amount is acceptable in a rising market, as the amount will grow within the fund.
• Proportioning Rule – Tax free & taxable components must be calculated before the super interest split.
• Related party acquisitions.
• Pre 99 geared unit trusts.
• Accessing UNPB without needing to meet a condition of release.
• Business clients – in specie contributions to offset capital gains losses in selling assets to fund settlements.
• Investor Clients.
• Government employees.
• Child Maintenance Trusts – enabling a child under 18 to receive income and be taxed at normal adult rates and the income is offset against the amount required to be paid to the child under child support. Works well for high income parents.