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Splitting the super ... and selling the home

Feature Articles

Cite as: (2003) 77(9) LIJ, p.56

Major changes have been made to the way in which courts can deal with superannuation under the Family Law Act 1975.

By Jacqueline Campbell

In the past, the options for taking into account differences in the parties’ superannuation entitlements were limited. Any adjustment was usually made through the parties’ entitlements to current property such as the home. The Family Law (Superannuation) Amendment Act 2001 (the Amendment Act) which began on 28 December 2002 has introduced more options but greater uncertainty.

What has changed?

The Amendment Act inserted a new Part VIIIB into the Family Law Act 1975 (Cth) (the Act). Unvested superannuation can be dealt with more directly. For example, superannuation can be split at the time of the division of other property or, with more confidence than before, when the superannuation vests.

The main changes include:

  • unvested superannuation is now defined as “property” for the purposes of para (c) of the definition of “matrimonial cause” which gives power under the Act for the court to make orders dealing with the property of the parties;[1]
  • the trustees of a superannuation fund can be directed by the court to do certain things;[2]
  • the interest of a party in the superannuation fund of the other party can be protected with injunctive orders called “flagging” orders;[3] and
  • the interest of a non-member in the fund of a member may, in some circumstances, be secured by a “splitting” order.[4] With accumulation funds, the interest of the non-member can usually be transferred out of the member’s account to create two separate accounts.

There is much uncertainty about the effects of the Amendment Act on overall property entitlements. It is unclear what impact the s75(2) factors, which apply directly to the assessment of how superannuation is to be divided, will have. Some of the unanswered questions include:

  • will s75(2) factors have the same impact on superannuation as on non-superannuation property? More impact? Less impact?;
  • will homemaking spouses be better off or worse off?;
  • will superannuation be split in the same percentage as non-superannuation?; and
  • if superannuation is split or flagged, how will this affect the division of non-superannuation?

Principles of property division

To assess the property entitlements of the parties the court must take three main steps:[5]

1. value the assets, liabilities and financial resources of the parties;

2. assess the contributions made by the parties or on their behalf. These can be:

  • direct and indirect financial contributions to property;
  • direct and indirect non-financial contributions to property; or
  • direct contributions to the welfare of the family; and

3. weigh up the s75(2) factors such as age, state of health, income, earning capacity and obligations to care for children.

At the end of this process there is an over-riding requirement that the court make an order which is “just and equitable”.[6]

Even before the Amendment Act, entitlement to superannuation was relevant to the division of non-superannuation under sub-ss75(2)(b) and (f). Superannuation was not otherwise dealt with in any detail in the Act.

The law before

Before 28 December 2002, unvested superannuation could only be dealt with indirectly and in limited ways. Discrepancies in the parties’ superannuation entitlements were adjusted:

  • not at all;
  • by the party with less superannuation receiving more saleable assets;
  • by making interim orders dealing with some or all of the property and adjourning the proceedings until the superannuation vested; or
  • by making orders which only took effect when the superannuation vested.

Injunctions against the trustees of the superannuation funds were usually not binding. The rights of third parties could only be affected by court orders in limited circumstances.[7] Injunctions could legally be made against the member of a superannuation fund but were hard to enforce. If, in contravention to an injunction, superannuation was withdrawn and dissipated, enforcement was useless. There must be property to enforce the orders against. A prison sentence for contempt is only a punishment. It may achieve some type of revenge but does not equate to a just and equitable settlement.

Before the amendments, it was often extremely difficult to achieve a just and equitable settlement if one party had large superannuation entitlements relative to the property pool. A primary caregiver usually ended up with the home and a primary income earner kept their superannuation entitlements. The primary income earner’s standard of living was often reduced, at least in the short-term, because unvested superannuation could not be used to acquire a home or other realisable assets. On retirement, the primary caregiver often had little or no superannuation and was dependent on social security benefits.

Will adjusting superannuation be preferred?

The government’s original position paper[8] proposed that superannuation be split on the West & Green[9] formula in all cases unless the matter was within a specific exception.

However, under the Amendment Act, the court retains discretion as to how it deals with discrepancies in superannuation.

The explanatory memorandum states that the objectives of the Amendment Act are to:

  • encourage parties to take responsibility for their own affairs wherever possible;
  • minimise compliance costs; and
  • be consistent with the government’s broader retirement income policy goals.

The memorandum concludes that:

“There are naturally some tensions between these objectives and a result that achieves one objective may lead to an inability to fully meet another objective ... The preferred option would, therefore, seek to offer a solution that provides reasonable balance between any conflicting aims”.

The policy objectives of the reforms listed in the government’s position paper were:

  • full value should be recognised;
  • guidance for parties agreeing on solutions;
  • access to information;
  • a clean break;
  • consistency with retirement incomes policy; and
  • ease of administration for superannuation schemes.[10]

Simply calling superannuation “property” was not considered in the position paper to be the complete answer.[11] The position paper concluded that as superannuation was future property it must be dealt with differently to current property. This distinction is not clearly made in the Amendment Act.

As one of the purposes of the legislation was to ensure that parties have adequate resources to fund their own retirement and reduce the burden on the social security system, will splitting or flagging of superannuation be preferred over adjustments through non-superannuation?

Arguably, an adjustment made through non-superannuation property should be less than one made through superannuation. The reasons for this include:

  • an unvested interest in superannuation is not saleable or useful like cash or current assets; and
  • after retirement, the effect of the s75(2) factors may be different than they were before retirement.

In most cases it is impossible to accurately predict the needs of the parties when the superannuation vests. Disparity in incomes or of fortune (such as choice of home, employment opportunities, new partner, health, investments or winning a lottery) may significantly impact on the parties’ respective financial positions in ways not envisaged when the parties separated or made orders to adjust property. If there is an age disparity between the parties, the needs of a younger primary caregiver may not be as great as the older primary income earner close to retirement.

Contributions

Arguments about contributions may arise under Part VIIIB. Direct financial contributions to superannuation will arguably be given greater weight than the indirect contributions of a homemaker to superannuation.

This is, however, contrary to the Mallet v Mallet[12] line of authority. If this argument is accepted, a homemaker spouse’s contributions to non-superannuation may be equal to those of the primary income earner but the contributions of the homemaker spouse to superannuation may be assessed as being less, say only 20 to 40 per cent.

What if both parties earned income but one party directed more of their income to build up superannuation than the other? The other party’s income may have been used for household expenses. There should be no difference in the parties’ entitlements because of the different ways in which they have used their incomes. However, one party may have “wasted” income on gambling or entertainment. That party may be penalised for voluntarily choosing not to build up superannuation.

Questions of “waste” may also arise if one party unilaterally decided to direct substantial income into a superannuation fund with a high-risk portfolio. This fund may have a low value at the time of the property settlement. The other party may have invested the same amount in superannuation but have greater entitlements due to the less risky nature of the portfolio. Arguably, the party who gambled on a more risky investment should not receive a proportion of the other party’s superannuation as well.

What does this mean in practice?

As an example, assume that the husband has superannuation of $160,000 and the wife has $10,000. There is a home worth $450,000. The wife has a car worth $20,000, a caravan worth $10,000 and furniture of $20,000. The husband has a $20,000 car and a $10,000 boat. Contributions are assessed as equal but the s75(2) factors favour the wife.

The court orders a 70/30 division of non-superannuation property in the wife’s favour. This is not, though, the end of the exercise. A decision must be made as to how superannuation will be taken into account. The task of the court and the parties’ legal representatives is far more complex than it was in the past. There are many more options including:

1. 70/30 division of non-superannuation property and a 70/30 division of superannuation
The wife keeps the home, her car, the caravan and the furniture. She has a $129,000 mortgage but is also entitled to an additional $102,000 of superannuation. This sum can either be split from the husband’s fund or flagged and dealt with later.

The husband receives cash of $129,000 from the wife and retains his car and boat. He has $48,000 left in his superannuation fund for himself.

2. 70/30 division of both non-superannuation property and superannuation but the adjustment of superannuation is made in non-superannuation
The wife keeps the home, her car, the caravan, the furniture, a $27,000 mortgage and her $10,000 of superannuation. The husband keeps his superannuation, car and boat and receives cash of $27,000 from the wife.

3. 70/30 division of non-superannuation property but superannuation is split 50/50
This option assumes that when the parties retire either:

  • the s75(2) factors will be about equal; or
  • it will be so difficult to predict them that a 50/50 split is reasonable in the circumstances.

The wife keeps the home, her car, caravan and furniture. She has a $129,000 mortgage. She is entitled to an additional $70,000 of superannuation which can either be split from the husband’s fund or a flag placed on it.

4. 70/30 division of non-superannuation property and a 40/60 adjustment of superannuation through non-superannuation
This is the “discount for cash” model. The wife keeps the home, her car, caravan and furniture. She has a $75,000 mortgage and her $10,000 of superannuation. The husband keeps his superannuation, car and boat and receives cash of $75,000 from the wife.

5. Pre-28 December 2002
How does all this compare to the situation before 28 December 2002? An adjustment for superannuation may have occurred along the lines of the formula in West & Green. In addition to 70 per cent of non-superannuation property the wife received an adjustment of non-superannuation property to account for 50 per cent of the discrepancy in the parties’ net superannuation entitlements.

The wife retained the home, her car, caravan and furniture and her superannuation. Her mortgage was $59,000. The husband kept his car, boat and his superannuation and received a payment from the wife of $59,000.

The court still has a discretion to make orders in similar terms.

6. Increase the impact of the s75(2) factors on non-superannuation property
The court may decide either generally or in a particular case to split or flag superannuation rather than make an adjustment through non-superannuation property. The primary caregiver and children will be worse off than if the settlement of property occurred before 28 December 2002. To avoid this outcome, the court may assess the s75(2) factors differently to give the wife a higher loading than 20 per cent for s75(2) factors.

Options 1, 3 and 4 above result in the wife having a higher mortgage than under the West & Green scenario set out in option 5. Presumably the wife and children will have a lower standard of living. Section 75(2)(3) requires the court to consider “a standard of living that in all the circumstances is reasonable”.

To achieve the same current standard of living as before the Amendment Act, the wife needs 83 per cent of non-superannuation property. As she receives a division of non-superannuation property on top of the split of superannuation she will be far better off in the longer term than she was before 28 December 2002.

Selling the home

Will homemaking spouses be better off or worse off under Part VIIIB? Will they be more or less able to keep the home?

After 28 December 2002 the wife might be required by the court to accept a splitting or flagging of superannuation. The delay in receiving a share of the superannuation will affect her current financial position and her ability to retain the home for the children. She may not be able to afford the increased mortgage. More homes will be sold. Primary caregivers will be worse off under the new scheme.

The option of superannuation splits will arguably have a big impact on the outcomes of negotiated settlements regardless of how the law develops. There is wide public knowledge of the changes. There is also widespread knowledge of the original proposal for equal splitting set out in the position paper. The courts have a wide discretion and there are no guidelines. These factors have opened up a vacuum for stronger parties to achieve financially advantageous settlements.

Courts may favour the retention of the matrimonial home by the primary caregiver over the splitting of superannuation. However, there may be huge pressure on homemaking spouses, particularly those anxious to achieve an out-of-court settlement, or to avoid splitting or flagging so that they can retain the home, to accept a “discount for cash”. Rather than an adjustment of 50 per cent of the discrepancy as under West & Green they may only receive a sum equivalent to say 40 per cent. Alternatively, they may accept a splitting or flagging order and a sale of the home, rather than risk the uncertainty and costs of going to court.

Conclusion

It is easy to pose questions about outcomes under the new regime but not so easy to answer them. The complexity of the scheme suggests that it could be several years before clients can be given advice with any confidence at all.

The range of possible outcomes in a property settlement are far greater than they were. This may not be better for clients. Increased legal uncertainty and more options usually translate to higher legal costs and a longer period of emotional and financial uncertainty for parties. Even if courts are sympathetic to the desires of primary caregivers to retain the home, it may be far more costly in all ways to achieve that outcome.


JACQUELINE CAMPBELL is a partner at Aitken Walker & Strachan. She is an accredited specialist in family law, a member of the Law Institute Family Law Section Maintenance and Property Committee and consultant author of CCH Australian Family Law and Practice.


[1] Section 3.

[2] Sub-sections 90ML(4), 90MU(1) and 90MZD(1).

[3] Sections 90ML and 90MU.

[4] Section 90MT.

[5] Ferraro and Ferraro (1993) FLC 92-335; McLay and McLay (1996) FLC 92-667.

[6] Section 79(2).

[7] Ascot Investments Pty Ltd v Harper (1981) FLC 91-000.

[8] “Superannuation and Family Law: A position paper”, commonwealth Attorney-General’s Department, 1998, p53-60.

[9] (1993) FLC 92-395.

[10] Superannuation Legislation Amendment (Family Law) Bill 2001 – explanatory memorandum, pp31-34.

[11] Note 10 above, pp29-30.

[12] (1984) FLC 91-507.

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