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Superannuation splitting: cure or curse?

Feature Articles

Cite as: (2003) 77(7) LIJ, p.50

It remains to be seen whether legislative changes involving superannuation will solve a long-standing problem in family law - namely, how to properly deal with an asset that is ordinarily not available for immediate division.

By Adrian Stone

On 28 December 2002, the provisions of the Family Law Legislation Amendment (Superannuation) Act 2001 came into operation.[1] Together with associated regulations, these provisions enable separating married couples and courts exercising jurisdiction under the Family Law Act 1975 (Cth) (the Act) to effect a division of their superannuation entitlements. While there is little doubt that the options presented by this new legislation will accord greater flexibility to separating spouses, it will be some time before any impact the new legislation will have on current practices is known.

An analysis of the likely effect of these changes should begin with the experience of other jurisdictions. In England and Wales, a similar scheme allowing the division or earmarking of superannuation interests began in December 2001. These “pension sharing” laws were initially forecast to be used in up to 50,000 of the 160,000 anticipated divorces in 2002.[2] In the first six months of operation however, only 367 couples made use of the options to split their superannuation.[3]

There are possibly many reasons for the relatively dismal application of the options presented with respect to the division of superannuation entitlements in England. An examination of some of the prominent practical features of the English approach may ensure that the changes in Australia achieve their intended purpose.

There are three basic areas that appear to have presented problems. First, there seems to have been a general reluctance on the part of superannuation fund members and their spouses to use the splitting options.[4] Second, there was (at least initially) a hesitation among practitioners to make use of the new options, whether as a result of their unfamiliarity with the provisions or their uncertainty about implementing them. Third, there was a heavy workload associated with effecting any split, reflected in the administrative burden placed on trustees and supervisors of retirement savings accounts to facilitate the changes.

It is hoped that the nature and extent of media and professional coverage regarding the provisions of the new legislation will enable most practitioners to advise their clients about their operation and use. However, building familiarity with the practical application of superannuation splitting may be dependent on the options being widely adopted and used.

The legislative changes were introduced as the solution to a long-standing problem in family law – how to properly deal with an asset that is ordinarily not available for immediate division and is beyond the effective control of the parties. This issue takes on added significance when you consider that superannuation is now said to constitute at least 25 per cent of the asset wealth of the average Australian family.[5] With an ageing population, tighter government policy and superannuation guarantee legislation, it is likely that this proportion will increase significantly over time.

Before the changes it was necessary to offset the superannuation entitlement of one party by providing the other with a larger share of the asset pool. This potentially left one party with insufficient capital to re-establish him or herself in the short term. But will the ability to divide such a major component of the average “asset pool”[6] necessarily overcome this problem?

It would be straightforward enough if separating spouses each had an individual superannuation entitlement of an equal or equivalent amount. There is, however, a real and continuing discrepancy between the number of men and women who have interests in superannuation funds.[7] Not only do fewer women have superannuation, but the median value of the superannuation held by women is considerably less than that of men. It is also inversely proportionate to the number of children a woman may have.[8] Where separating couples have low overall asset wealth, superannuation tends to be, in relative terms, a larger component of the overall asset pool. As a result, those who would ordinarily benefit the most (at least statistically) from the option to split superannuation are women with limited means who have children.

Research has shown that women who are poor are less likely to avail themselves of legal advice during the course of separation. Unfortunately, therefore, those who would be best suited to make the most from the splitting of superannuation (spouses without their own superannuation interests and in a low-wealth family) are likely to be the very people who do not make use of the new options.

In the explanatory memorandum to the legislative changes which was circulated in 2000, the federal Attorney-General indicated that “the lack of flexibility in dealing with superannuation means that current property must often be traded away in exchange for an asset that may not be able to be realised for many years. This leaves one party with the realised asset of the house, yet with no retirement income and the other party with no realisable assets but often significant retirement income”.[9] Interestingly, the prospect of the latter spouse in the above example insisting on the division of their superannuation interest may create a different (and perhaps more challenging) problem. The manager of a large retirement savings group recently indicated that the division of superannuation between separating spouses, made in the context of a division of their capital, “could leave both parties with insufficient accessible proceeds to buy a new home”.[10] (author emphasis)

For example, assume that a separating couple has a jointly-owned unencumbered home valued at $200,000 and that the husband has a superannuation entitlement of an equivalent amount. In circumstances where the parties wish to divide their assets equally, the difficulty has been that the husband would necessarily keep his superannuation and so be left with a resource to which he has no immediate access. The wife, while keeping all the available capital, would be similarly disadvantaged in that she would be left with no future financial security.

If the husband was to insist on the division of his superannuation entitlement so as to gain immediate access to some capital, it may be unavoidable that the home be sold with no guarantee that either party would then be able to purchase elsewhere. The ability to divide the superannuation entitlement on a proportionate basis will alleviate this problem, but in such cases will not provide a real solution to the immediate difficulties faced by the spouse left with little capital and a relatively large amount of superannuation.

It is, of course, the case that administrative considerations are relevant to the ease with which the new options can be used.

The amendments themselves will have a significant impact on the operations of trustees of superannuation funds as they present many varied administrative and compliance issues. For example, on receiving a request in the appropriate form, a trustee is required to provide information to a member’s spouse regarding the member’s entitlement.[11] They are prevented, under risk of personal penalty, from revealing the address of the member to the spouse, just as they are prevented from informing the member that a request for information has been made. Trustees are obviously required to effect the terms of an order or agreement regarding the splitting or flagging of a superannuation interest and thereafter provide ongoing information to the members. While trustees and administrators of funds are entitled to charge “reasonable” fees for these administrative tasks,[12] it remains to be seen how much these charges will be and what impact their imposition will have on the overall operation of the splitting scheme.

Another potential problem for trustees and managers under the new scheme lies in the introduction of superannuation agreements. These agreements are analogous in form and operation to the binding financial agreements currently provided for in the Act.[13] They provide a means by which separating couples can formalise an agreement with respect to the division of superannuation without the need to involve the courts. While the agreements need to comply with certain requirements and be certified by each partyindependent practitioner, they are otherwise limited in only three basic respects:[14]

  1. they must identify the superannuation interest which is the subject of the agreement;

  2. the agreement must be in force at the operative time (as defined in the legislation); and

  3. the relevant superannuation interest must not be an interest with a withdrawal value of less than $5000 (referred to as an “unsplittable interest”).

As superannuation agreements are not, by definition, ratified by a court or necessarily administered by any other authoritative body, it is likely that the terms, content and wording of each agreement will vary. Parties to the agreement (unlike the court[15]) will be able to specify the method by which the superannuation interest will be split and are not otherwise required to obtain a valuation of the interest to be split.[16] This may give rise to particular problems. For example:

  1. The provisions of the new legislation override any inconsistent state and commonwealth laws and are paramount to anything contained in a trust deed or other prevailing instrument regarding a superannuation interest. Trustees of superannuation funds are required to give effect to superannuation agreements which, given the vagaries of drafting, may be difficult to comprehend and/or facilitate.[17]

  2. While the Act makes specific provision for a trustee to be accorded “procedural fairness” when making any order with respect to their fund, it is difficult to anticipate how a trustee will be involved in the preparation of a superannuation agreement, if at all.

  3. Before a superannuation agreement has any effect, the parties need to have married and separated. Agreements become operative four days after they have been served on the trustee on the basis that the trustee is also provided with a decree absolute or a “separation declaration”. These declarations attest to the fact that the parties were married but have separated (or that they have lived separately and apart for a continuous period of 12 months and there is no prospect of them resuming cohabitation where the superannuation interest exceeds a current limit of $112,405).[18] In the absence of a court order (where such declarations are not necessary) and in circumstances where the parties have not been required to obtain a valuation of the interest (and may be unsure as to whether the interest is unsplittable or whether the $112,405 threshold has been exceeded), it may be that the trustee is required to be somewhat proactive in ensuring that the documents they receive and the agreement they reflect comply with the legislation. This translates to additional administrative work for the funds.

  4. Superannuation agreements can be made before marriage, although they will only take effect on marriage and after separation. It does not matter whether or not the superannuation interests are in existence at the time the agreement is made.[19] It is presumably possible therefore for one spouse to provide an individual separation declaration to a trustee, together with a superannuation agreement that makes no specific reference to the interest to be split. Trustees will no doubt incur an additional workload as a result.[20]

Overall, changes to the ways in which superannuation can be handled in family law disputes are to be welcomed. However, whether they will ultimately provide a comprehensive solution to the problems of the past remains to be seen.

ADRIAN STONE is a senior associate at Coadys. He is a member of the Family Law Section of the Law Institute and the Law Council of Australia, as well as being a former associate with the Solicitors Family Law Association of England and Wales. He is admitted to practice in Australia and the UK.

[1] See Part VIIIB of the Family Law Act 1975 (Cth) (the Act).

[2] “Don’t settle for anything less”, The Guardian, 20 July 2002.

[3] Note 2 above.

[4] Victoria MacCallum, “Merits of pension splitting ignored in most divorce cases” Law Gazette, Law Society of England and Wales, July 2002.

[5] Dewar et al, “Superannuation and divorce in Australia” Australian Family Briefing, Australian Institute of Family Studies, April 1999.

[6] See s90MC of the Act, whereby superannuation is now treated as “property” for the purposes of s79 of that Act.

[7] In late 1997, research indicated that 76 per cent of men and 34 per cent of women had superannuation entitlements on divorce; see “Superannuation and divorce in Australia”, note 5 above.

[8] Note 7 above. The median value of women’s superannuation on divorce was about $5500 while for men it was $26,152. While the number of children a woman had was inversely proportionate to the level of her superannuation, the opposite was true for men.

[9] See the Regulation Impact Statement to the explanatory memorandum of the Family Law Legislation Amendment (Superannuation) Bill 2000, circulated by the federal Attorney-General Daryl Williams.

[10] “Splitting super can threaten assets”, Herald Sun, 3 February 2003.

[11] The requisite information is detailed in the Superannuation Industry (Supervision) Regulations 1994 and the Family Law (Superannuation) Regulations 2001.

[12] See s90MY of the Act.

[13] See Part VIIIA of the Act.

[14] See s90MJ of the Act.

[15] While the Court is limited in the way that it can order that an interest be split (see s90MT of the Act), parties are able to specify a “method” in a superannuation agreement provided that they provide a worked example to the trustee as to how the split is to be effected (see s90MI(b) of the Act).

[16] Section 90MT(2) provides that the Court must determine the value of a superannuation interest before the same can be split.

[17] It should be noted that s90MZE provides some protection for trustees: “The trustee of an eligible superannuation plan is not liable for loss or damage suffered by any person because of things done (or not done) by the trustee in good faith in reliance on: (a) any document served on the trustee for the purposes of this Part”.

[18] See ss90MP and 90MQ.

[19] See s90MH(1).

[20] It should be noted that the recent Family Court decision in Hickey [2003] FamCA 395 alleviates some of the potential administrative burdens presented by the recent amendments. The Full Court clarified that in circumstances where parties sought to finalise their financial relationship without making any adjustment to their superannuation entitlements, it was not necessary for them to comply with the valuation requirements of the Family Law (Superannuation) Regulations, or to provide procedural fairness to the trustees of the relevant funds.


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