Thus, it is important that advisers remain alert to the possibility of their clients suffering relationship difficulties, particularly during COVID-19, so that expert advice can be sought where required in the context of a relationship that is about to or has already broken down irretrievably.

Where a relationship breakdown has occurred, there will be numerous issues for the parties to consider, including how superannuation (which is broadly considered “property” for the purposes of the Family Law Act 1975 [Cth] [FLA]) is to be divided.

Due to the complexity of the super splitting rules, it is recommended that expert advice be obtained regarding what options are feasible under the rules and how best to structure a proposed split from a superannuation law and tax perspective.

This article discusses some key considerations regarding how the splitting rules operate. (Note that this article focuses on splitting superannuation interests in an SMSF and not large public offer funds or defined benefit funds.)

Splitting Orders

The starting point is that a division of superannuation entitlements can only occur pursuant to a prescribed split recorded via:

• minutes of consent (as endorsed by a court) or a court order under the FLA, or
• a financial agreement covering superannuation (made by the parties, with each side receiving independent legal advice).

For convenience and ease of expression, we refer to the term “Splitting Order” below to include a split pursuant to a court order (whether a contested order or consent order arrived at by the parties to a court action) and also to a split in accordance with a financial agreement.

As discussed below, once there is a Splitting Order in place, additional documents are required to actually implement the Splitting Order.

However, we pause now to consider some technical aspects of how Splitting Orders operate.

Member and non-member spouse

This article refers to a “member spouse” and “non-member spouse” in explaining key features of the splitting rules. This terminology comes from s 90XD of the FLA and pt 7A of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR).

These terms can broadly be explained as follows:

• A member spouse (MS) is a spouse or former spouse who is a member of the fund and whose superannuation interest is subject to split which reduces their superannuation benefits.
• The non-member spouse (NMS) is a spouse or former spouse who is obtaining the benefit of a split which increases their superannuation benefits.

Thus, the label NMS does not necessarily mean that the person is not a member of the fund — it simply means that there is a split operating in that person’s favour. Indeed, in a typical two-member SMSF with a former couple, each spouse would be considered an NMS in respect of a split from the other’s interest in the fund, notwithstanding that they are both members of the fund. That is, the NMS will typically have their own interest (i.e. based on them being a fund member with an account balance in the fund) as well as the split interest to be transferred or rolled over.

However, in the context of a single-member SMSF where the member’s interest is subject to a split, the NMS will not be a member of the fund.

It should be borne in mind that for multi-stage or cross splits, it is possible for the parties to alternate between being an MS and an NMS at different stages of the split. For example, one common strategy is for one spouse to give up 100 per cent of their super to the other spouse as a preliminary split before they can receive a base amount (discussed below) in their favour as part of an agreed property settlement. In this scenario, the spouse is an MS for the first stage of the split and an NMS for the second stage of the split.

Accordingly, it is best not to confuse MS/NMS status with SMSF membership.

Types of splits — base amount order

A Splitting Order can specify an amount (or formula for determining such an amount) that is payable to the NMS.

A base amount can be determined in advance and interest accrues and is payable on this amount up to the time of payment, transfer or rollover.

Interest is based on a rate that is 2.5 per cent above the percentage change in the original estimate of full-time adult ordinary time earnings (AOTE) for all persons in Australia, as published by the Australian Bureau of Statistics during the year ending with the February quarter immediately before the beginning of the adjustment period (i.e. AOTE + 2.5%). The rate for the financial year ending 30 June 2020 is 4.8 per cent per annum.

Using a base amount approach can be useful from a practical perspective because the parties may find it easier to make progress on broader property negotiations where a fixed number (or an ascertainable number) is used for the purpose of the superannuation split.

Types of splits — percentage split order

As an alternative to the base amount approach discussed above, Splitting Orders can also provide for a “percentage interest split”. Under this approach, the superannuation interest is generally divided by specifying a percentage of the member’s splittable interest that is to be paid to the NMS.

The percentage specified in the order is generally applied to the splittable payment at the time the payment is required to take place.

This means that valuations and updated financial statements or management accounts are broadly required to ascertain and divide the member balances at that time, including earnings (or negative earnings) and any capital appreciation (or capital devaluation).

Thus, under a percentage split approach, the actual amount that is split is not fully determined until the time the payment, transfer or rollover is made.

Base amount v percentage split

The most appropriate splitting method for a couple sharing an SMSF on a relationship breakdown depends on a range of factors. What may be good for one party may be adverse for the other party. Thus, each party should ensure they obtain expert advice from their family lawyer and other experts before deciding on what method best suits their particular needs.

The following table provides a general guide of some important factors to consider:

When are super splitting documents required?

As noted above, it should be noted that Splitting Orders do not actually implement a split of superannuation. At the risk of oversimplifying, the reason for this is that the SMSF trustee (as a third party to the spousal relationship) is not bound by Splitting Orders.

Thus, Splitting Orders are only the first step in the process. The parties will also need to put in place documents to enliven the relevant provisions of the SISR to implement the split.

In broad terms, this requires a four-step process:

• Step 1 — The NMS serves the Splitting Order on the SMSF trustee together with a notice under reg 72 of the Family Law (Superannuation) Regulations 2001 (Cth).
• Step 2 — The SMSF trustee gives each party a notice, called a ‘payment split notice’. This notice is the formal notification to each of the parties that the MS’s superannuation interest is to be split under the terms of the Splitting Order.
• Step 3 — The NMS makes a choice regarding how the split is to be implemented (eg, to create a new interest, roll-over the amount or pay a lump sum) and notifies the SMSF trustee of this choice. (A modified process under reg 7A.10 of the SISR applies if the NMS does not make a choice.)
• Step 4 — The SMSF trustee must then give each party a notice that the split has been implemented.

Many advisers and SMSF trustees overlook these requirements and assume that Splitting Orders are broadly self-executing. However, it must be emphasised that the above steps are absolutely critical to ensure a legally effective split.

A purported split that is implemented without enlivening the relevant provisions of the SISR will be open to legal challenge and could result in contravention of superannuation law (e.g. due to the minimum benefits of the MS being illegally forfeited).

Conclusions

There are numerous variables to consider in making the critical decision of what type of split works best depending on which party you are acting for. Moreover, we often do multiple splits for the same couple which may involve a mix of base amount and percentage splits.

There are also a range of commercial, tax, super and legal issues to consider, and expert advice should be obtained by all parties to ensure that an optimal outcome can be achieved. In particular, each party should obtain their own advice from their own family lawyer. The Family Law Rules 2004 (Cth) also provide for the appointment of a joint expert including a superannuation expert to provide advice and assistance. 

This article provides a general guide only and is no replacement for expert advice given the complexity of the superannuation, taxation, family law and other factors that relate to an effective super split.

William Fettes, senior associate, and Daniel Butler, director, DBA Lawyers