Going through a separation or divorce can be incredibly distressing, particularly when children are involved. Often, the last thing you want to think about is superannuation, which can seem daunting and complex and tedious, on top of all of the other administrative burdens associated with such an event. Being aware of the rules and regulations is crucial to achieving a good outcome and securing your financial future – as superannuation is often a couple’s most significant financial asset.
New superannuation splitting laws mean that superannuation interests are split between spouses on separation to ensure a more fair and equitable outcome for both parties.
I’m getting divorced: What do I do?
- Firstly, take a deep breath. The best thing you can do is to get informed, know your options and face the problem equipped with the knowledge you need to secure your own financial future.
- Set up a meeting with your accountant or financial advisor and your lawyer, they should be able to give you any relevant financial information pertaining to your circumstances. If you have a Self-Managed-Super-Fund, access a specialist who deals with SMSFs – as they will be able to help you navigate any additional requirements, especially if both spouses are trustees of the Fund.
- Know what is involved in the process: Divorces and separation require the division of assets vis-à-vis a property settlement. This will involve:
- Court orders (either by consent or where parties cannot agree)
- Financial agreement (including those that are Superannuation related)
- A combination of both court orders and a financial agreement
- Develop a Financial Agreement: A financial agreement is a binding legal document entered into between both parties when a marriage or in a de facto relationship ends. The Agreement outlines the division of the property between partners. A superannuation agreement follows the same lines, but deals with superannuation interests exclusively. Either agreement is a necessary requirement of a separation or failure to adhere to the agreement can have serious consequences for that party as the other spouse may seek further compensation via a property adjustment or additional maintenance.
The formal requirements for either agreement include:
- Before the agreement is signed, both parties have to have a written statement that legal advice was sought and accessed
- A copy of the legal practitioners statement is provided to the other party or their legal representative
- The agreement has not been set aside by the court.
- Agreement is signed by both parties
All of this is more difficult done than said, because obviously there are deeply emotional factors and often agreements cannot be reached. When this happens, the separating parties may apply to the courts to arrange for the property settlement
- Get informed about your Self-Managed Superannuation Fund: SMSFs operate within their own system of rules and regulations, and these can be hard to navigate. If both spouses are members and trustees of a SMSF, then you will need to think about how the fund will administrated into the future. It may not be possible for the spouses to continue to hold their benefits in the same fund, and arrangements will need to be made for new trustees of the existing fund once relevant benefits have been distributed.
Further consideration must also be given to the receiving spouses options. Chapman Eastway will assess your circumstances to determine:
- Do the benefits remain in the same fund, or will the receiving spouse need to establish a new fund?
- Would they be better suited to a retail or industry fund or are they prepared to meet the additional administrative requirements of an SMSF themselves?
- Will the Fund need to sell any assets to facilitate a payment Split? What are the tax implications of doing so? In addition to this, there will be additional requirements to value the benefits held in the SMSF before any payment splits can be entered into. This will result in the trustee often having to arrange for interim financial statements to be prepared to ascertain the most up to date value of the benefits held in the fund. It may also require additional valuation fees (from real estate valuers for example) or actuarial reports where the fund holds reserves or has an unusual benefit structure. There may also be a requirement to seek further legal advice in relation to the operation of the Fund’s trust deed. Often these considerations result in additional costs that must be taken into consideration
- Learn about your superannuation options: There are generally three options to deal with superannuation benefits on separation. These include:
- Payment Flagging: Where the interest in a fund has been flagged for a particular event to occur at a point in the future. Interests subject to a flagging order or agreement cannot be paid out until a flag-lifting agreement is entered into. Generally a flagging agreement is entered into where the value of the interest cannot be determined, thereby allowing the parties to protect their interests whilst waiting for a future event to occur (such as retirement). Once a payment can be made from the fund under a flagging order or agreement, the trustee must notify the member and non-member spouse, which acts as a trigger for them to determine what to do with the benefits. Then a flag-lifting agreement is entered into which may result in a payment splits.
- No split or flag – another option available is to divide the balance of the property between the parties, taking into consideration the value of the superannuation benefits. This effectively means that the superannuation interest are not split or subject to flagging orders, but remain untouched, with the partner spouse being compensated by the allocation of non-superannuation assets of the relationship.
- Payment Split: This is where the spouse who is a member of a fund has part of their superannuation needs paid to the non-member, ex-spouse. How this happens depends on the specific circumstances however generally, the payment ha three options within itself
- The new interest is created in the fund
- The interest is rolled over or transferred to another fund
- The interest is paid out in the form of a lump sum payment (provided that a condition of release has been met by the non-member spouse).
A superannuation split under a financial agreement (including a superannuation agreement) can only be made if a marriage or de facto relationship has broken down. This can be demonstrated by a decree absolute dissolving a marriage, or a separation agreement where a couple is not divorced or the relationship is de facto
It is important to remember that as superannuation is now considered a type of property, it is included in the pool of assets of the relationship, to be dealt with appropriately. It is not as easy as one party taking their interest, or splitting it down the middle. Therefore it is important to ensure that an agreement is reached that is legally binding. It is also important to ensure that where an SMSF is involved, both parties are signatories for any bank accounts or trading platforms. This will ensure that money is not withdrawn before the process has been completed.
- Learn about the Income Tax consequences of superannuation payment splits: Another important consideration is the income tax consequences of payment splits on separation. The below table provides a brief description of the key income tax implications of payment splits:
Superannuation lump sum payments
Where a payment split results in a superannuation lump sum being paid to the receiving spouse where they have met a condition of release, it is treated as a separate superannuation benefit, and is assessed to the receiving spouse under the ordinary rules (tax free if they are over 60, and taxed at marginal rates less the low rate cap if they are under 60). The components of the benefit payment will be divided into a taxable and tax-free components in the same proportions as the total benefit just prior to the payment split.
Superannuation income stream
Where an income stream or annuity is split, a new income stream is commenced for the receiving spouse and is assessed according to the rules that apply to them (tax exempt if they are over 60 or taxed at marginal rates less a 15% rebate if they are under 60). The components of the benefit payment will be divided into a taxable and tax-free component in the same proportions as the total benefit just prior to the payment split
Capital gains tax exemptions
Capital gains or losses arising from the creation of rights when a superannuation agreement is entered into or terminated are disregarded. CGT rollover relief is available for in-specie transfers between SMSFs and another complying fund.
Summary: Separation or divorce can be a difficult time, without all of the added complexities of superannuation splitting. The following is a brief summary of the steps involved in relation to splitting superannuation benefits:
- Contact your accountant or advisor to advise them of what is happening, especially if you have a SMSF
- Obtain independent legal advice
- Decide how you will split the benefits
- Financial agreement
- Court orders
- Send a copy of the finalised agreement to the fund’s trustee or administrator and your advisor
- Value the benefits in the fund (which may require interim financial statements)
- Split the benefits based on the agreement
- Ensure any administrative requirements for a payment split have been met. This may involve setting up a new member account or new Fund
- Once the payment split has been finalised, ensure the trustee structure of any existing SMSF has been addressed.
Remember that separation is a balancing act – it involves both give and take and requires both parties to take a reasonable and pragmatic approach when it comes to the division of assets. At the end of the day, superannuation is a financial asset, so it is important that you give due consideration to ensuring that your retirement needs are met. Don’t let emotional differences cloud financial decisions. After all, it is your future financial independence.
This article was edited by Olivia Falkiner from information developed from Schaefer, S, 12/12/14, BDO, Superannuation, Accessed 7 November 2016.