This post is on a complex subject – superannuation – a class of property which lies at the intersection of financial planning and family breakdown. With superannuation being a topic which is ‘heavy going’, even by lawyer standards, financial adviser, Josh Mashman, of AMP Advice, Miami, and a member of the Gold Coast Collaborative Law Group, has helped me with this week’s, post. Thank you, Josh!
Following relationship breakdown, couples must resolve the fate of their relationship wealth. Often the focus is on the bricks and mortar assets. But superannuation is important too, and has always been caught up in family law breakdown. After all, it is often one of the most valuable items of property accrued during a relationship.
Where parties have had different roles during a relationship – one of them in the workforce, accruing superannuation, and one of them caring for children, and therefore making no superannuation contributions – great thought is given as to how to deal with this ‘differential’. Adjustments, called ‘payment splits’, are often made to achieve justice and equity between spouses who are no longer together, the effect of which is to transfer funds from the superannuation accounts of one spouse, to the superannuation account of the other spouse.
It is a complex problem, the resolution of which often requires careful advice to be taken from family lawyers, and superannuation advisers. Often it is hard for the parties to understand their options.
Well, now that challenge has become even more complex, as superannuation is in a state of flux with the introduction of changes to superannuation law following the 2016 Budget and the passage of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, new law which begins to have real life effect as from 1 July 2017.
The superannuation law changes have introduced the concept of a ‘transfer balance cap’ – a maximum limit of the amount of superannuation which can be transferred to super in the retirement phase (tax free pension). For individuals who are in receipt of a pension on 1 July 2017, that limit is $1.6M (and it will be indexed over time, with the transfer balance limit to be determined at the time an individual becomes eligible to receive a pension). Super over that limit can still be maintained within the superannuation system, albeit in an accumulation account (and will therefore be taxed differently).
Each individual in the retirement phase has a transfer cap which applies to them (and cannot be ‘shared’), and which is determined by examining the balance of the their ‘transfer balance account’. That account is rather like a bank account or ledger – amounts transferred into, or received during, the retirement phase, are credited to that account. Certain transfers out of the retirement phase are a debit on that account balance. To transfer funds into the retirement phase, you must have available ‘credit’ in your transfer balance account.
But what will be the impact of these changes on family law? The answer remains complex.
For people who have existing Order or Financial Agreements in place, providing that a portion of Spouse A’s retirement phase superannuation (e.g. superannuation based pension) is to be paid to Spouse B, those payments will be counted towards the calculation of the balance of Spouse B’s transfer balance account.
For people who are in the process of negotiating superannuation outcomes following family breakdown, they will need to have an eye on the changes in the law, and ensure that they take careful advice about how their settlement is structured, before signing on the dotted line.
Where the superannuation which is being ‘split’ is in the accumulation phase, a split from Spouse A’s superannuation account to Spouse B’s superannuation account will not affect the calculation of the transfer balance account. This is because the superannuation has not yet entered the retirement phase, and the transfer balance limit is a value ‘ceiling’ which is applicable only when superannuation is put into the retirement phase.
Where that superannuation is in the retirement phase, however, and the superannuation being split is being paid out as a pension, things are different:-
- If Spouse A and Spouse B agree that Spouse A’s superannuation in the retirement phase will be commuted (effectively converted to a lump sum, if the superannuation fund in which Spouse A’s interest is held permits this), causing a reduction in the value of Spouse A’s superannuation), and the commuted sum paid to Spouse B, then:
1.1 Spouse A’s balance transfer account is debited (reduced) by the sum paid to Spouse B (spouse A suddenly has more ‘credit’ in their transfer balance account);
1.2 If Spouse B is not retired, and has therefore not commenced a pension, there is no adjustment to their transfer balance account. However, if Spouse B uses those funds to establish a super income stream, Spouse B’s balance transfer account is credited with the sum applied to retirement super (and Spouse B consequently has less ‘credit’ in their transfer balance account);
- If Spouse A’s superannuation in the retirement phase cannot be commuted to a lump sum, and is therefore adjusted on the basis that Spouse B then receives a defined share of each individual pension payment, then:
2.1 Spouse A’s transfer balance account is reduced by the total value of the payment to which Spouse B is entitled;
2.2 Spouse B’s transfer balance account is credited with the full value of Spouse A’s super interest, but a correction is then made by debiting Spouse B’s account to the extent of the value of the super interest retained by Spouse A.
For the appropriate debits to the transfer balance account to be reflected, either Spouse A or Spouse B must provide a copy of the Order of Financial Agreement containing the superannuation splitting provisions to the ATO.
Some clients have questioned whether, if they enter into an Order or Financial Agreement achieving a split of their retirement phase superannuation before the new laws become effective on 1 July 2017, they can avoid their reach. The short answer is ‘no’ – for those individuals with retirement phase superannuation, their transfer balance limit will be calculated on the value of the capital generating the pension as at 1 July 2017.
The applicability of balance transfer limits will, however, likely cause spouses who have superannuation in the accumulation phase to make decisions with a view to planning what is to occur in the retirement phase – spouses with significant superannuation well above the transfer balance cap may be open to transferring superannuation to their spouse, and spouses with superannuation well under the balance transfer limit and who have limited scope to make additional superannuation contributions may make the ‘topping up’ of their entitlements to that cap a real priority when resolving the financial aspects of separation.
Planning is important, as there are other changes also being rolled out on 1 July 2017 – the annual concessional contributions cap (the sum which can be contributed to super each year without tax consequences) is being reduced from $30,000 to $25,000 for those under 49 as at 30 June 2017 (and to $35,000 otherwise), and the annual non-concessional contributions cap is being reduced from $180,000 to $100,000. This means that:-
- A party who, well into their working life, has split their superannuation in favour of their spouse may face challenge in ‘replenishing’ that superannuation; and
- A party who has been out of the workforce, and who is older at the time of separation or divorce, will struggle to build up superannuation.
Superannuation remains an area requiring the taking of specialist advice, more so now than ever before. Looking ahead to the impact of superannuation splitting, in particular on transfer balance limits, is now a vital step before any family law deal is done. In short, if your family law situation involves retirement phase superannuation, or if if there is a significant differential in the superannuation balances of you and your spouse, have your family lawyer work with a superannuation expert to craft the optimum outcome for your case.