Advisers assisting clients through divorce need to understand that under the Constitution, the Commonwealth Parliament has power to reallocate property of the married couples. And this includes superannuation payments.
Parliament can enact legislation dealing with the superannuation payments of someone, but not the superannuation interests. Therefore, under the Family Law Act, a Court can require a superannuation trustee to pay all or part of someone’s superannuation payment to their former partner or spouse.
Splitting provisions are complex because they need to be universal, says Michael Hallinan from Townsends Lawyers. They also need to cater for splitting arrangements that have been privately reached, and for “clean breaks”, which convert the right to receive all or a portion of all future superannuation as a lump sum.
However, Hallinan says the provisions can be understood by making a few “simplifying assumptions”.
Those simplifying assumptions are that only accumulation interests are provided; that the interests are fully vested and that the interests, if payable as pensions, are only payable as account pensions.
A beneficiary may waive their rights under a payment split. This waiver is provided by s90MZA of the Family Law Act, 1975.
“It would be possible for the beneficiary to waive their rights in exchange for, say, a transfer of non-super assets from the Affected Member [the superannuation member].
“However, waivers are not used much in practice as the beneficiary must be provided with independent financial advice from a licensed financial adviser as to the effect of the waiver. This will require the adviser to consider whether the loss of rights under the payment split is matched by some other consideration – such as the transfer of non-superannuation assets. There will be time and cost involved in this process, particularly as the financial adviser must certify that the advice was given,” said Hallinan.
The Trustee must also have the relevant power to undertake the conversion process. The powers conferred by the SIS Regulations only refer to allocated pensions and market linked pensions: these provisions were not updated in 2007 when account based pensions were introduced.
“It seems that if the governing rules have not been updated since 2007, then Trustees will not have the relevant power. In this situation the payment split cannot be converted but will crystallise in accordance with the Family Law (Superannuation) Regulations,” Hallinan said.
“Undoubtedly, the issue of splitting superannuation benefits will grow as more SMSFs are affected by divorce. The advice community will have to adjust and accept a new complexity in their client arrangements where divorce touches their client’s super.”