Advice

Superannuation

The new law allowing couples to split their superannuation interests upon separation has now been with us since 28 December 2002. It is clear that the effect of the new law has enabled couples to have greater flexibility in the way in which they structure their property settlement upon separation. This has no doubt enabled more people to reach agreement in relation to financial issues than may have occurred before.

"However, it has become clear in the eight months since the new law came into effect that there are unanticipated pit falls people may fall into when negotiating their agreement which people must be aware of or seek advice from a lawyer who specialises in this area," said Juliette Ford a partner of the Canberra based firm, Farrar Gesini & Dunn.

In summary the amendments made to the Family Law Act provide that superannuation be treated as property rather than as a financial resource. The new law enables separating couples to "split" their superannuation interests so that each person has a superannuation interest of a certain value. It also enables people to "flag" a superannuation interest. "Flagging an interest" is appropriate in circumstances where it is difficult or inappropriate to split a superannuation interest.

Leaving aside the option of flagging an interest, what does splitting an interest mean? There are two ways to split an interest.

  1. A split in the "payment phase" :- for example one party, usually the husband is in receipt of a pension being an entitlement which accrued during the period of the marriage. An agreement may be reached which provides for a split of this pension so that each person receives a proportion of this pension. There is no restriction on how the pension may be divided, that is 80/20%, 60/40%, 50/50%. The ability to split a pension is a positive development. It is an attempt to address circumstances in the past where there may have been very little other property to divide because the husband and wife during their relationship made a decision to invest all of their financial resources into one Superannuation Fund on the assumption that upon their retirement they would enjoy the fruits of this investment together. Sounds good. "It is here that it is very important that both parties seek financial advice in relation to whether this is a good option for them" said Ms Ford. In circumstances where there are little or no assets apart from the pension or where the pension is of such a value that it is impossible to structure a financial settlement in a way which gives each person a fair share of the assets then a split of the superannuation pension is preferable. But there can be some unanticipated consequences. For example:
    1. Tax - It is important to remember that the pension will be treated as income and could increase one person's taxable income such that they move into a new marginal tax bracket. This is subject to the type of pension and type of Fund being split.
    2. Centrelink entitlements in the long term.
    3. In circumstances where they may be options open to a separating couple to structure a financial settlement which gives one person a greater lump sum rather than a split of the pension or which provides that there be a division of the current assets and a split of the pension, then it is very important to seek specialist legal and financial advice given the reasons listed above.
  2. A split in the "growth phase": - The other type of split is a split of each parties' superannuation interest before either party is able to access their benefits eg before either party has retired. This is the most attractive and most common option sought by separating couples. However, again there are some very important issues to be aware of. They include:
    1. What type of Superannuation Fund is it? This is particularly important in Canberra where a lot of people are members of public sector superannuation schemes which are valued and operate on a different basis to what are called Accumulation Funds. This creates an added complexity about how such interests in such schemes are valued. And again, in this arena it is important that people seek advice.
    2. Once the valuation issue is overcome in some defined benefits schemes (such as the Government schemes) there are difficulties in "rolling out" the non-member's interest from the member's superannuation account into a new account. "The proper drafting of these Agreements is crucial. In these circumstances it is very important for people to seek legal advice" Ms Ford said.

Separating couples must be aware of the potential tax implications of these sorts of orders/agreements. This includes the Reasonable Benefit Level of both parties and the extent to which either person has contributed to their superannuation prior to 1983 and after. "The new law has been a long time coming and gives separating couples great opportunities to negotiate a settlement which were not open to them previously. We are finding more and more that we are working most closely with accountants and financial planners when exploring appropriate settlement options for our clients' said Ms Ford. "Family law is a complex area in which to practice. It is becoming more and more so as this area of law in relation to superannuation evolves".