Tim Sanderson explains the division of superannuation when relationships end and financial interests go their separate ways.
Since 2002, superannuation interests have been able to be included with other property when determining “who gets what” in the event of the breakdown of a marriage. This treatment has also applied to many separating de facto spouses since 2008.
Due to the specific treatment of superannuation, it is therefore important to understand the process for dividing and transferring superannuation when such a relationship ends.
Two common ways of deciding how the superannuation of a separating couple will be split are:
- Superannuation agreements; and
- Court orders.
Superannuation agreements/binding financial agreements
A superannuation agreement forms part of a binding financial agreement. Binding financial agreements were introduced to allow separating couples who could reach agreement on a property split to do so without the delay, cost and the emotional toll of going to court.
These agreements can be made before, during or after a relationship, and set out how the property of a couple, including their respective superannuation interests, will be divided in the event that the couple separate.
Binding financial agreements will be legally binding on a couple if both members have a copy, have received independent legal advice and have signed the agreement. These agreements cannot (except in rare circumstances) be overturned by a court.
Court orders
Where a binding financial agreement does not exist, a court order from the Family Court will generally be required to allow property (including superannuation) to be divided. There are two types of court order.
Consent orders – where a separating couple have come to an agreement on how their property should be divided (but they do not have a binding financial agreement) they can apply to the court to issue a consent order. This ratifies the agreement between the two parties and makes it binding.
Financial orders – where a separating couple cannot come to an agreement on how their property should be split, the court can issue a financial order to divide the couples’ assets based on the circumstances of the case.
Splitting superannuation upon relationship breakdown
When transferring the superannuation of one member of a separating couple (the member spouse) to the other member (the non-member spouse), one of two methods may be used.
Splitting the member’s interest
Where the member spouse’s super balance is in an accumulation account or in an account-based or term-allocated pension, there is the opportunity to immediately allocate the non-member spouse’s entitlement to them. This may include:
- Opening a new account within the fund for the non-member spouse;
- Rolling over their entitlement to another complying fund of their choosing; or
- Paying the entitlement to them directly (if a relevant condition of release has been met).
The non-member spouse is able to choose which option will apply to them, and the fund must comply with their choice, except where this is not possible (for example, their chosen fund cannot accept rollovers).
Where the non-member spouse has not made a choice, the fund trustee generally has the option of:
- Creating a new interest within the fund on their behalf;
- Rolling the non-member spouse’s entitlement to an eligible rollover fund; or
- Taking no action until benefits become payable.
Splitting payments from the fund
Where the member spouse’s super balance is a defined benefit interest, it is generally not able to be split until benefits become payable from the fund. This may, for example, occur when the member spouse reaches retirement and a lump sum or pension becomes payable.
Lump sums (including commutations of a defined benefit pension) that become payable can then be:
- Directed to a new account within the fund for the non-member spouse;
- Rolled over to another complying fund; or
- Cashed out (subject to a condition of release being met).
Pension payments, however, must be paid directly to the non-member spouse.
Process required for splitting super interest
The procedure that must be followed and the evidence required by a super fund in order to instigate the splitting of a superannuation interest or payments depends on a number of factors and is shown in table 1.
Once the super fund has received the required evidence, it is then required to notify both members of the separating couple within 28 days. The non-member spouse then has a further period of 28 days (or longer if allowed by the fund) to nominate whether they wish to retain, rollover, or cash out their entitlement.
Flagging superannuation interest prior to a split
A separating couple can agree on, or a court can order, a payment flag to be placed on a member’s superannuation interest. This does not trigger a splitting of benefits, but instead prevents the trustee from allowing most withdrawals from the interest.
A payment flag might be an appropriate precautionary measure where:
- The couple have separated but a property settlement has not yet been reached; or
- The superannuation interest cannot be split until retirement (for example, where the member’s interest is in a defined benefit fund).
An existing payment flag can be lifted by agreement of the separating couple or by the court, then allowing a superannuation interest or payment split to occur.
A payment flag cannot be placed on an interest already being used to pay a pension (for example, an account based pension or a defined benefit pension).
Tax components and preservation
Any superannuation interest transferred to a spouse upon relationship breakdown must be made proportionally from tax components and preservation status.
For example, John has a super balance of $300,000 and is required to split 30 per cent of his balance to Sarah. John’s balance would be split as shown in table 2.
Tim Sanderson is Colonial First State’s senior technical manager.
