Superannuation may represent a significant portion of your assets. It is there to fund a more comfortable retirement for you. Its treatment on any breakdown of your relationship should be carefully considered.
Since 2002, the Family Court has been able to adjust and divide superannuation upon the breakdown of relationships. Before the legislation, the member would keep their own superannuation and the non-member spouse would receive a larger portion of the non superannuation assets. This created inequity in many cases.
The Family Law Act provides two methods to divide superannuation; namely splitting or flagging.
What is Splitting?
A Splitting Order directs the trustee of a superannuation fund to transfer part of a superannuation member’s benefit to the superannuation fund of their spouse. This transfer is known as a roll-over.
The date of effect of the split must be specified in the Court Order and more often takes place within a week of the Court Order being served on the Trustee.
The recipient of a superannuation split can only have access to that superannuation if they have met a condition of release. Your financial advisor can help you to understand conditions of release.
What is Flagging?
Flagging means that a decision to split a member’s superannuation benefit has been deferred to a date in the future. Generally a flagging order is made where a party is nearly or has already met a condition of release. The “flag” notifies the trustee not to release or deal with the benefits without first notifying the parties who flagged the superannuation fund.
During the time the flag is in place, the benefit cannot be paid to the member. If the member meets a condition of release, the fund must notify the Court or the parties. The fund will have to then wait for instructions from the parties or the Court before the benefit can be paid.
Flagging is also useful in the case of defined benefit superannuation interests. These tend to grow strongly in the final years before payment. Flagging and waiting may give the non-member spouse a better outcome than an earlier split. You need to think about these options very carefully if you or your spouse has a defined benefit fund.
A flag can only be lifted by a Superannuation Agreement or by a Court Order.
Valuation of Superannuation Interest
Generally, accumulation interests do not have to be valued and a member’s current statement is sufficient to show the member’s entitlements. However, defined benefit superannuation schemes must be valued prior to the Court hearing. It is sensible to value them before reaching an agreement about superannuation division.
To obtain a valuation, a family law superannuation valuation application form must be lodged with the superannuation fund. The superannuation fund will complete the form and provide the information to the applicant in writing. The form will then need to be provided to the expert (usually an accountant or actuary) in order for the superannuation to be valued. The valuation uses a technical formula.
The expert considers a range of potential matters when valuing superannuation interests. These may include the value of the superannuation fund:
1. At the date of cohabitation;
2. At the date of separation; and
3. Closer to the date of the hearing.
Self Managed Superannuation Funds
Self managed superannuation funds (“SMSF”) can be split or flagged just as any other fund may. However, splitting orders tend to be safer for a SMSF. Before a split occurs any assets held by the fund should be valued.
Parties in a marriage or a de facto relationship may either agree on a flag or superannuation split or have a Court determine how their superannuation should be divided. If parties agree to a superannuation split, they can enter into a Superannuation Agreement or sign Consent Orders.
CGT and Splitting Superannuation
CGT roll over relief is available for a split if it occurs pursuant to a Superannuation Agreement or through orders under the Family Law Act.
The division of superannuation after a marriage breakdown is complex. This short summary is designed to give you general information only. As always, the right advice is critical. Well considered, the legislation allows for fair, proper and equitable sharing of a mix of relationship assets.