Dividing Superannuation in Family Law Settlements
For family law purposes in Australia, superannuation is treated as “Property” and can be divided between the parties after the breakdown of a marriage or the breakdown of a de facto relationship. Rather than cashing out the super money, however, the superannuation is “split” and assigned to the partner who is entitled to a top-up.
Superannuation interests can be divided via a judge-made court order, a consent order without appearing in court, or by a binding superannuation agreement (either a stand-alone superannuation splitting agreement or part of an overall financial agreement).
Can all super funds be split immediately after separation?
The answer is no. Some funds cannot be immediately split due to the nature of the fund or certain restrictions on the fund. This can be investigated by contacting the family law department of the trustee for the relevant super fund. You can still enter into an agreement to divide the super, with it to come into effect once the fund’s restrictions change. Fortunately, most super funds are in fact able to be split immediately after separation.
If the superannuation interest cannot be divided at the time, “a payment flag” can be imposed by either a court order or a superannuation agreement. Superannuation flags were more commonly used just after the 2002 legal amendments but can also be used to put a warning on a fund before family law proceedings are finalized. The reality is that in most family law cases superannuation interests can be split and the use of superannuation flags is not commonplace.
In some circumstances, however, the super fund characteristics have changed so much that it cannot be considered property to divide and only a financial resource to be taken into consideration. For example, if the superannuation is in the form of a pension that cannot be converted to cash at any time, then it will usually be considered a financial resource and relevant more in terms of income and spousal maintenance. Having said that, there have been instances where a party to a family law proceeding was able to get an order to split the super pension income, so they received 50% of the super pension payment each fortnight.
What’s the formula to split up super funds after separation?
Because super has so many different manifestations it is impossible to formulate an overall approach about how it all plays out in the division of the asset pool. But generally, there are two common approaches that may be taken when dealing with superannuation:
OPTION A. The two asset pool approach involves identifying two separate asset pools: (1) non-superannuation assets such as the usual house, cars, investments, bank accounts, etc. and (2) totals of superannuation. Each of the pools is divided in accordance with the considerations found in the Family Law Act in sec 79 or sec 90SM for de facto couples. This approach will usually result in a superannuation split to give effect to the appropriate division of superannuation.
Illustration: Sally and Peter have separated, and the children are living with Sally. They have a non-superannuation asset pool of $500,000 which includes an unencumbered property worth $350,000, cash of $50,000, and a share portfolio of $50,000. Peter has superannuation of $200,000 and Sally has $50,000 super. Sally wants to retain the house if possible as she isn’t working and can’t service a mortgage if she has to take out another mortgage on the property to pay Peter out. The agreed division is 60% to Sally and 40% to Peter. Under the two pools approach, the outcome would be:
Sally retains her $50,000 superannuation and receives $112,500 from Peter’s superannuation resulting in her retaining 60% of the superannuation pool.
Sally is entitled to $300,000 of the non-super pool and Peter is entitled to $200,000. Sally cannot pay Peter out and therefore the house is sold, and the parties divide the proceeds, the cash, and the share portfolio to give effect to the agreed split.
OPTION B. The alternative approach is where there is no difference between superannuation and non-superannuation assets in the calculation method, so they are all grouped and one pool of assets is used for the overall calculation. This approach may be used if one party wants to retain the house, car, bank funds, etc. and the other party has a larger amount of superannuation. It is common to be used in situations where the bulk of the assets lies in the superannuation rather than other assets.
Illustration: Applying this approach to the previous illustration, the asset pool including superannuation all added together and equates to a total of $750,000. Sally is entitled to 60%, being $450,000. She keeps the house and the cash along with her superannuation. Peter retains his superannuation and investments. This is not however the likely approach a court would take because in many ways this is unjust to Peter as he retains superannuation which he may not be able to withdraw and spend (unless at retirement age) but leaves him with little else to re-establish himself. However, this may still end up being a negotiated outcome if settled out of court.
What if it was a short relationship and I had a lot more super than my partner?
In such situations, the “contributions” argument can be used to minimize or even avoid any superannuation split, so that the final property settlement includes a binding clause that each party keeps their respective superannuation and not be allowed to make any future claims against the other’s super. Whether there is an entitlement to a super split in the first place depends on the overall history of contributions, length of the relationship, care of children, age and health of the parties, future needs, and many other factors that are taken into account under the Family Law Act.
When is the best time to make a superannuation splitting agreement?
Because superannuation is treated as property in family law settlements, the best time to make a superannuation splitting agreement is usually at the same time and within the property settlement agreement that deals with all other assets. Of course, there are exceptions depending on the phase of the super fund, how big the asset pool is, and the timing of when the super funds can be cashed out e.g. for retirement or permanent disability. One thing not to do is just divide all the non-super assets on a fair basis and completely ignore the values of each party’s super fund. Once a binding settlement is made, it is generally the last time to visit the issue of dividing superannuation or at the very least, taking into account unequal superannuation holdings to get a fairer result on the other assets.
For legal advice about your personal situation, contact Michael Benjamin & Associates.