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Superannuation and Family Law

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By Jeremy Hogg, Associate, MST Lawyers

Superannuation: all of us have it, few of us pay any attention to it, and even fewer of us really understand it. When spouses separate, however, the unasked question of superannuation is transformed from “something to think about later” to an important and present issue. Whilst most parties are able to simply and cleanly divide their superannuation, complications can and do arise. 

The following points will hopefully assist you (or your client) in understanding the basic issues surrounding superannuation in family law and in recognising and addressing some of the types of complications that might occur (before it’s too late!).

  1. Superannuation is property

Since it was amended in 2002 the Family Law Act 1975 (Cth) has provided that superannuation is to be treated as property in family law proceedings, allowing it to be ‘split’ between separating spouses (albeit still subject to  the usual restrictions on accessing superannuation prior to preservation age).  For a trustee of a superannuation fund to split superannuation, however, the trustee must be served with either an order of the family law courts (i.e. the Family Court or the Federal Circuit Court) or a properly executed Financial Agreement providing for the superannuation split to occur.

In family law proceedings, superannuation is often treated as being in a ‘pool’ of its own distinct from the parties’ non-superannuation assets although sometimes a ‘global’ asset pool approach is adopted. Whilst superannuation is often split equally between separating spouses there are a range of circumstances which can lead to a split between parties occurring in different proportions, for example, where one party had a significant amount of superannuation prior to the commencement of the parties’ relationship, or where one party is unlikely to be able to build any further superannuation in the future. In rare cases there may be no adjustment of superannuation at all.

  1. Super ain’t super

Most of us have our superannuation held in ‘accumulation’ plans, which effectively operate as cash deposits invested on our behalves by our superannuation fund. The way that accumulation plans operate is simple: member contributions, plus or minus investment losses/gains, less fund administration fees, equates to your member entitlement.

There are still those, however, who hold the less common (but often more valuable) ‘defined benefit’ interests.

Whilst the value of an interest in an accumulation plan can be easily gleaned from the most recent member statement, the value of a defined benefit interest at any given time is calculated as the product of a number of factors such as average salary, age, and length of tenure with the employer. To complicate matters further the ‘family law value’ of a defined benefit will invariably differ from the amount shown on a member statement.

The family law valuation of a defined benefit interest can vary from fund to fund, depending on issues such as:

  1. Whether interests in the particular fund can be valued using the usual family law guidelines, or if instead it has an approved valuation methodology specific to that fund; and
  2. Whether the fund provides its own family law valuations or of it simply provides members the information necessary for a third-party actuary to complete the task (at a cost).

It is accordingly important that, before negotiating around the quantum of a superannuation split as part of a property settlement, the type of fund being considered is established and its proper value for family law purposes has been ascertained.

        3.  Did we mean to do that?

Effecting a superannuation split can have unintended consequences, particularly when dealing with defined benefits, which may not appear until the split has already occurred and it is too late for any changes to be made.

For example, a pension that pays $1,000 per week to one party being split between two parties on an equal basis would presumably result in each party thereafter receiving $500 per week. This, however, is not necessarily the case. In most instances, following a family law split of a pension the fund will recalculate each party’s entitlement based on their individual circumstances.  It is not uncommon for the aggregate amount received by both parties to in fact be higher or lower than the amount that was being received by the original recipient.  An understanding of the impact of the pension split during the negotiation phase may lead parties to reconsider whether they wish to split the pension at all, or if they would prefer to make an adjustment against non-superannuation property instead.

Another commonly overlooked issue is the family law debt account which arises following a split of a defined benefit in the Emergency Services & State Super fund (‘ESSS’). Whilst a lump sum value for an ESSS defined benefit can be obtained, the impact of treating that notional lump sum the same way you would treat an accumulation interest can be significant due to the impact of the family law debt account.

When a superannuation split is effected from an ESSS defined benefit interest, rather than drawing from the member’s entitlement ESSS creates a debt account from which the member is effectively ‘borrowing’ the funds from ESSS to pay the superannuation split to their former partner. The debt account is then indexed at a rate of the AWOTE (Average Weekly Ordinary Time Earnings) + 2.5% until the benefit becomes payable to the member or the member achieves the maximum benefit multiple.  Where superannuation splits are often in the range of hundreds of thousands of dollars, a party who is many years from preservation age may find that the interest accrued on an ESSS family law debt account has significantly eroded their entitlements, whilst during the same period their former partner has been able to enjoy the benefit of their fund investing the split monies seeing significant gains.

When parties negotiate a superannuation split it is crucial that not only the terms of the split are taken into account, but also the impact and outcome of the split on each of them now and in the future.

  1. Asset rich, cash poor

If your superannuation is held with a large financial institution or an industry super fund, your entitlements are likely a drop in the ocean of the billions of dollars of assets managed by the fund. Splitting some tens or hundreds of thousands of dollars to your former spouse out of your interest will have little impact on the fund.

For parties with self-managed superannuation funds, however, the impact of transferring half or even more of the fund’s total value out to another fund will often require a significant reshuffling of the fund’s assets.

Before agreeing to a superannuation split from a self-managed fund the member who will remain in the fund should take into consideration the practicalities of actually effecting the split, taking into account issues such as:

  1. What are the fund’s readily available cash reserves?
  2. If there will not be enough cash to make the superannuation split, is an in specie distribution possible?
  3. If an in specie distribution is not possible, what assets will need to be liquidated to effect the split?
  4. What costs might there be involved in any liquidation – for example, will there be capital gains tax on the sale of shares, or selling costs involved in marketing a property owned by the fund?
  5. What is the confidence level that the balance sheet values of the assets held by the fund will be achieved on disposal?

It may be necessary to adjust the value of a superannuation split to ensure that realisation costs or underwhelming sale prices are shared between the parties and do not become the de facto burden of the remaining member.

The issues discussed above are by no means a comprehensive guide to all of the matters to be taken into account, or the complications that might arise, during the course of negotiating and effecting a family law superannuation split. They do provide an illustration, however, of the types of issues that may lurk beneath within the murky waters of superannuation and will hopefully act as a cautionary tale for those faced with the task of dealing with superannuation in a family law context.

If you require assistance negotiating or effecting a family law property settlement please contact our Family Law team by email family@mst.com.au or by telephone +613 8540 0200.