The Family Court can make orders in relation to the property of the parties to a marriage under Pt VIII FLA (Family Law Act 1975). The parties to a marriage can also make financial agreements about the division of their property under Pt VIIIA FLA.
Prior to 28 December 2002, superannuation interests could not be split at a marriage breakdown, that was because, at common law, a person’s interest in a superannuation fund was not generally regarded as “property”. Rather it was considered to be merely a “future interest” until a condition of release had been satisfied. Pt VIIIB was introduced in the Family Law Act to deem a superannuation interest to be treated as property. Pt VIIIB also allows for the “splitting” and “flagging” of superannuation interests. From 1 March 2009, Pt VIIIAB makes similar provisions in respect of opposite-sex and same-sex de facto couples.
Superannuation can be split either by an order of the Family Court or an agreement by the parties to a marriage. The vast majority of cases are settled by an agreement.
There are strict formal requirements regarding how to make a valid agreement. (S 90G: When financial agreements are binding)
- The agreement must be signed by all parties
- Before the agreement was signed, each party was provided with independent legal advice from a legal practitioner about the effect of the agreement on the party’s right; and whether the agreement was to the party’s advantage
- Each party was provided with a signed statement by the legal practitioner that the advice was provided
- A copy of the legal practitioner’s statement provided to each party is given to the other party or his/her legal practitioner
- The agreement must not have been terminated or set aside by a court
The agreement is only effective in relation to “splittable payment” (s 90ME). A splittable payment is a payment that contains a superannuation interest that can be split by a superannuation agreement or court order. Most superannuation interests are splittable. However, certain payments, such as incapacity and hardship payments are not splittable. Family Law (Superannuation) Regulations 2001, Reg 12 to 14Q cover all payments that are not splittable payments.
The entitlement of the non-member spouse (the “non-member spouse” could be an existing member of the SMSF, it’s nevertheless still called “non-member spouse” in the context of super splitting) is provided in accordance with Division 7A of the SISR:
- By creation of a new interest
- By transfer or roll over of the interest
- By lump sum payment where the non-member spouse has satisfied a condition of release
The parties to a marriage can also enter into a “flagging agreement” in respect of a superannuation interest. The agreement prevents the trustee from paying any splittable payments in respect of the interest. Flagging agreements continue to have effect until a “flag-lifting agreement” is signed by the parties. The Family Court can also make a “flagging order” or terminate a flagging agreement.
Flagging could be created when the actual value of the superannuation interest is unknown at the time, but will become known in the future, for example, a defined benefit interest. Flagging is far less common than splitting.
CGT relief is available under section 118-313 ITAA 1997 in relation to a superannuation agreement under Part VIIIB FLA. Capital gains or losses are disregarded from creation of the new interest.
CGT rollover relief is available when assets where in-specie transferred (S 216-140 ITAA 1997). The cost base of the asset moves across to the new fund and remains unchanged.
A superannuation lump sum paid to, or a superannuation interest created for a non-member spouse after a payment split is a separate superannuation benefit for the non-member spouse. The components of the benefit are split in the same proportion as the overall split.
For example, if the $80,000 is split from $200,000 to the non-member spouse, and the tax-free component of the $200,000 is $50,000. Then the tax-free component of the $80,000 is $20,000.