Superannuation Splitting

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Superannuation Splitting

• Tricia Peters
• PetersMcKeown Pty Ltd
• March 2008

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Agenda

• Superannuation what is it?
• Superannuation and family law
• Valuations - where are we after CC?
• Orders/agreements
• Splitting superannuation JMRBAR
• Summary

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What is superannuation

• A tax-effective retirement savings vehicle
• Different types of superannuation funds
• Accumulation funds
• Public offer funds
• Employer funds
• Industry funds
• Defined benefit funds
• Self managed superannuation funds

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Superannuation - size

• As at 30 June 2007, funds invested in
  superannuation reached 1.15 trillion

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Super statistics (30/6/2006)
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Superannuation Regulations

• Legislation
• Superannuation Industry (Supervision) Act and
  Regulations
• Income Tax Assessment Act (ITAA)
• Financial Services Reform Act (FSRA)
• Regulatory bodies
• APRA complying superannuation funds
• ATO self managed funds
• Superannuation Complaints Tribunal
• Fund trust deed

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Superannuation and family law

• New super splitting rules from 28/12/2002
• Limited powers
• Access to member superannuation details for
  non-member spouse mainly for valuation purposes
• Court can split or flag a super interest or can
  be done by a BFA

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Valuations

• Required for consent and Court orders where
  superannuation is split
• Not required for superannuation agreement
• Method of valuation specified in the FLSR for
  accumulation and defined benefit funds but not
  for SMSFs

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Valuations

• Clarified in CC
• Superannuation must be valued at the first step
  either by
• statutory method in FLSR if it is to be split, or
• by other means if super is not going to be split

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What is a valuation under FLSR?

• Accumulation fund
• Valuation provided by a trustee on a SIF, via
  Form 6 process
• Member statement
• Defined benefit fund
• Valuation using the formulas in FLSR
• Cant use member statement
• Only necessary when it is to be split

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How is a valuation obtained

• Form 6
• Superannuation Information Form
• Simple but
• Which fund?
• Which trustee?
• Where to send?
• How much?

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Where are we after CC (2005 FamCA1223)

• Superannuation to be treated in the same way as
  property (even if it is not property), either on
  the list of assets or on a separate list other
  specie
• Superannuation to be valued at Step 1 regardless
  of whether splitting or not
• Contributions of the parties to the
  superannuation must be assessed
• Superannuation to be considered in the light of
  any s75(2) factors and in the overall fairness
  and equity of the orders
• Superannuation can be assessed either on a global
  or asset by asset basis

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What value to use when?

• Must use value under Regulations if super is to
  be split
• Any agreed value can be used if no split
• May be more appropriate not to use Regulations
  value if super is to be offset
• Need to consider the likely timing of retirement
  or resignation

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Flagging order/agreement

• A flag can be put on a superannuation interest by
  order or agreement
• Trustee cannot make a payment to member while
  flag is in place
• Flag can be lifted by order or agreement
• Designed to be used when retirement is close

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Splitting order/agreement

• Court can order that an interest be split
• Order must include either a base amount or -
  cannot be a formula or any other means of
  calculating the amount to split
• Agreements can include a base amount, a split,
  or a means of calculating the amount to be split

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When does the split take place?

• At the discretion the trustee can either
• Clean break ie pay funds over to non-member
  spouse, usually via their nominated
  superannuation fund
• Piggy back funds are not paid over to
  non-member spouse until member takes his/her
  benefit
• Usually clean break only a few funds piggy
  back

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Impact of splitting order

• Super splitting so far has focused on
• Valuing defined benefit interests
• How to treat superannuation
• Should the super be split how much?
• How to deal with lifetime pensions
• Little focus on the impact of any split on the
  parties interests going forward
• BAR and JMR

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BAR and JMR (2005 FamCA 386)

• 13 years cohabitation separated for 8 years at
  date of hearing
• Interim settlement in 1998 super matters
  pending
• Husband a member of ESSS for some 30 years
  small ESSPlan interest
• ESSS valued at 403,810 resignation value
  534,085 (130,275 difference)

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Issues of concern

• Discounting of value based on retirement at age
  65
• Salary for valuation purposes was 4,000 below
  current salary
• Applicable tax rate and changing fund structure
• Pattern of increase in ABM contributions
• Expert expressed concern about valuation

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Issues of concern (contd)

• Young J decided the court had to make a
  determination rather than a valuation
• Determined to split the superannuation at time of
  retirement
• More certainty and eliminates the inequities
  inherent in the valuation
• Wife will share in increase in fund enjoy the
  benefits of the generous provisions of this
  particular Fund

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Contribution

• West and Green method not appropriate
• Greater contribution during period of marriage
  (32 increase in ABM pa) than post separation
  (10pa)
• Wife entitled to 10 of super fund (may be after
  taking into account a previous payment of 44,800
  by the husband)
• Plus 20-25 for 75(2) factors
• Wife to receive 35 of final benefit

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Analysis of the outcome

• Assumptions used
• No additional voluntary contributions
• No further promotions
• Salary to increase by CPI (est 3.5pa)
• AWOTE (est 4.5pa)
• Retirement at age 60 (9 years time)
• Return on market investments is 7pa

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How final benefit is calculated

• FAS X ABM
• At hearing
• 85,712.50 x 6.226 533,646
• At retirement (age 60)
• 116,817 x 7.126 832,440
• (An increase of between 5.15 and 4.95pa)
• Wife to receive 291,354 (35)

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Immediate split impact on member account

• The wife would receive a roll over to a fund of
  her choice (presumably 35 of 403,810
  141,334)
• ESSS would set up a contra account against the
  husbands superannuation
• Contra account will increase by AWOTE2.5
  (currently 6)
• Member has a growing debt against his account
  that comes off final benefit

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Projected outcome in 9 years time
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What to look out for

• Members who have a long membership, 20 years
• Members who have little promotional opportunity
• Members aged 45

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What is the problem?

• Maximum ABM ESSS 7.5 (previously 8.4)
• Once max ABM reached, increases in benefit only
  by way of salary increase, eg 3-3.5pa
• If there has been a superannuation split, the
  contra account continues to grow at AWOTE2.5,
  eg 6 - 7.8, ie more than the growth in the
  superannuation interest

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The orders in BAR and JMR

• A percentage splitting order under 90MT(1)(b) of
  35
• A flagging order under S 90MU of the Family Law
  Act
• The trustee is prevented from making a clean
  break split to the wife until the flag is lifted,
  this will not be until the husband retires
• Note requirement for a splittable payment
  becoming payable soon not addressed in the
  judgement

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Issues addressed in recent appeals

• MM (2006 FamCA 193), DJAJ (2006 FamCA 961)
• Three main issues in cases where there is a
  substantial superannuation interest in the
  payment phase
• How to assess non members contribution
• What value to put on the superannuation
• How to make orders that are fair and equitable to
  both parties

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Issues

• When do you need a valuation?
• Should you flag, split or offset?
• When will the non-member get control of the
  superannuation?
• What is the impact on the members account?
• When can the parties access their super?
• Any tax implications?
• Pension income streams? A big problem for
  another day!

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Conclusion

• Superannuation a growing family asset
• Valuation issues clearer after CC
• Defined benefit funds continue to be problematic
• Help is available