What Happens To Superannuation In A Divorce?
Written by: Helen Yau l Advisory Team
Marriage breakdowns leading to divorce can be one of the most painful and stressful times in a person’s life. One of the most valuable assets outside of the family home is superannuation. Superannuation can sometimes be overlooked in a divorce because it is preserved and generally cannot be accessed until retirement.
The Family Law Act 1975 considers superannuation to be property that can be split following a relationship breakdown just like other assets and property. Superannuation can be split two ways:
- By Court order; or
- By a splitting order or superannuation agreement.
Most couples do not rely on the courts to decide how to split property following a separation. Rather, they usually negotiate a settlement or mediate a settlement with or without the assistance of lawyers.
Whichever method you use to split your super whether that be by court order or mutual agreement, the trustees of your super fund will be bound by the terms of the order.
The net amount of a splitting order can be determined by either the base amount or a percentage.
Types of Superannuation Splits
Base Amount – the base amount is a specified amount or formula for determining the amount payable to the non-member spouse.
This will include interest earned by the fund if its member is in accumulation up to the time of the payment split. For defined benefit funds and Self-Managed Super Funds (SMSF), interest is determined by the Australian Government Actuary using a particular formula.
Percentage Split – a percentage interest split specifies a percentage of the member’s super balance that is to be paid to the non-member spouse. The actual amount that is to be split is not determined until the time of payment, transfer or rollover is made. This method may be more commonly used in the case where benefits are held in a defined benefits fund or superannuation in pension phase.
When Can You Apply For a Superannuation Splitting Order?
Superannuation can only be split if a marriage or de facto relationship has broken down. The breakdown of a relationship is proven by:
- A divorce certificate if the parties are divorced; or
- A separation certificate stating the parties are separated at the declaration time if the parties are not divorced.
How Will I Receive The Superannuation Split?
Whether you can access the super split as a cash benefit will depend on when you meet a condition of release and the preservation status of the benefit.
Generally, you meet a condition of release to access your super once you are:
- Aged over your preservation age and retired. Depending on your date of birth, your preservation age is between 55 and 60; or
- Aged over your preservation age and starting a transitional to the retirement income stream; or
- Aged over 60 and ceasing an employment arrangement; or
- Aged 65 or over.
A member’s benefit can be comprised of one or more of the following benefits:
- Preservation benefits – these cannot be cashed until a condition of release is met.
- Restricted non-preserved benefits – these cannot be cased until the related employment arrangement has been terminated.
- Unrestricted non-preserved benefits – these cannot be cashed at any time.
Therefore, if you have not met a condition of release or your super is preserved, the super split must be transferred or rolled over to your nominated superannuation fund and it will be preserved until you are able to meet a condition of release.
When Might I Defer A Superannuation Split?
In some cases, one or both parties may wish to defer to split the superannuation. This could be for several reasons such as one part is close to retirement and the value of the super balance is likely to increase or the superannuation benefit is a defined benefit. In such circumstances, the parties can seek a payment flagging agreement. The payment flag will prevent the member from accessing their superannuation, removing it from Australia or transferring it to other funds. Basically, it works like an injunction and puts a hold on the account acknowledging that the super balance is subject to a split at a later point in time.
The payment flag must be determined by agreement or Court order so a superannuation split can be made.
It is noted that a payment flag can be lifted to split the superannuation if an agreement is prepared and signed by both parties. The agreement must contain a statement that each part has received independent legal advice.
Tax Implications of Superannuation Splits
When a payment split occurs, the member spouse and the non-member spouse are entitled to a proportionate share of the tax components of the member’s superannuation benefit at that time.
The tax components of a super benefit are the tax-free and taxable components. The tax-free component is non-assessable and tax-free on withdrawal. Tax is generally payable on the taxable component but the tax will vary depending on if the benefit is paid from a taxed or untaxed element of the fund.
If a super pension that is currently paid to the member spouse is split, a new super pension will be taken to be commenced for the non-member spouse and the non-member spouse will be assessed for tax accordingly.
Don’t Forget to Update Your Binding Death Benefit Nomination!
Often, following a relationship breakdown, a member may forget to review and update their death benefit nomination with their superannuation fund.
All super funds permit members to make a death benefit nomination. The nomination informs the trustees how to distribute their super benefits in the event of death. The nomination can be non-binding to the trustee where the trustee has the discretion to consider the wishes of the members or binding to the trustee where the trustee has to legally follow the wishes of the member.
Generally, members will nominate their spouse to receive the death benefit on application and some nominations will be only valid for three years whereas some nominations are non-lapsing so it is important to update on your death benefit nomination when going through a divorce.
To update your nomination, contact your superannuation fund for a form. It is important to note, that for a binding death benefit nomination to be valid, the form must be signed before two witnesses over the age of 18.
Canny Advisory, Your Superannuation + Expert Financial Advice
Depending on where you are in your superannuation journey, it is important to ensure that you have a plan in place if something were to happen to you, including a marriage breakdown.
We have a team of experts in superannuation as well as self-managed super funds to ensure that your hard-earned retirement savings are in the safest of hands.
Get in touch with our team if you are in the process of a divorce, or considering a divorce to ensure that your superannuation is safe.
