After a long drawn out process of consultation, the amendments to the divorce laws, which will allow superannuation interests to be treated like other matrimonial property, have been passed by Parliament.
The new law will allow superannuation to be divided on the breakdown of a marriage. Divorcing couples will be able to do this by agreement, giving them the flexibility to settle their own financial affairs, rather than engage in costly and protracted litigation or by obtaining a court order if they cannot agree.
How will the new rules affect trustees?
Perhaps the first thing to note is that there is still some lead-time.
The law will not come into effect for at least another year. Much of the practical detail will be in amendments to the family law and SIS regulations, which we have not yet seen.
The regulations will include the important rules about how to value superannuation interests for purposes of dividing them between separating parties. There will be different methods of valuing most superannuation interests depending on whether the interest is an accumulation interest or a defined benefit interest.
In brief, the value of a fully vested accumulation interest will be the value of the interest recorded in the most recently received member statement, less any known surcharge liability. The value of a defined benefit interest, and a partially vested accumulation interest, will be determined actuarially, net of any known surcharge liability.
The regulations will also provide for the fees, which trustees will be able to charge to cover the costs of calculating and making payment splits, and other aspects of administering the rules. Another important part of the reforms, which will be in the regulations, is the option for most funds to create a new interest for a non-member spouse, instead of splitting future superannuation payments.
On the other hand, it is also important to note that, when the new rules begin, they will apply to any marriage that has been dissolved before that time, provided the Family Court has not yet made an order about the matrimonial property. The rules will apply immediately to any divorce where the marriage itself has been dissolved, but the spouses are still negotiating or litigating over the property.
What all this means is that trustees should start talking to their legal advisers and other providers soon about the changes to their administrative procedures that will have to be in place when the new rules take effect.
Other trustee obligations
When an agreement about payment splits or “flagging” a superannuation interest has been reached, clearly the trustee has to be formally notified, with the necessary documents. If the fund is not a self managed fund, the trustee then has four business days before the agreement takes effect, within which to inform the administrator and have the paperwork processed. Any payments due after that time will be affected by the agreement, so trustees and administrative staff will need to be aware of this very short lead-time.
The spouse who is not a member will have the right to seek information from the trustee about the member’s superannuation interest. These rules will have to be carefully observed, and staff will need to be educated about how to handle requests for information. This is because there are stiff penalties for a trustee who breaches the rules. For example, the trustee must not disclose the member’s address. On the other hand, the trustee is not allowed to inform the member that a request for information has been made.
Trustees should also be aware that the non-member spouse will have access to the Superannuation Complaints Tribunal on the same basis as the member.
There are some protections for trustees. The main one is that a Family Court order under these rules can not be binding on the trustee unless the trustee has received “procedural fairness”. This means that the trustee must have been given notice of the proceedings, been informed of when the proceedings will be heard by the court and been given an opportunity to be heard in the proceedings.
Although these changes are some way off, trustees should start planning now for the necessary administrative changes and staff training.
STOP PRESS: Tax consequences of super split
The Government has introduced a separate Bill to make some logical and necessary amendments to the tax laws, to allow for the tax consequences of a superannuation split between divorcing parties. The amendments include:
the non-member’s new entitlement will be treated as a separate ETP;
the undeducted contributions, concessional, post-June 1994 invalidity, CGT exempt components and the untaxed element of the post-June 1983 component will be split on a proportionate basis to the overall split; and
the non-member spouse’s benefit will be assessed separately against his or her own reasonable benefit limit.
The CGT rules and super contributions surcharge rules will also be adjusted.
— Brian Egan is a freelance technical writer on tax and superannuation issues.
