• Stella Jansen

Divorce, Superannuation, and the Gender Divide

New laws will make it more difficult for superannuation funds to be disguised during divorce processes.

The Australian Taxation Office (ATO) will be allowed to reveal details of an individual's superannuation information to a family law court beginning 1 April 2022.

The newly established legislation is intended to promote procedural and economic justice in divorce processes in order to avoid under-reporting of superannuation assets. While a spouse's superannuation information can now be obtained through legal action, if it is not supplied freely, obtaining factual information through subpoenas or court orders is generally costly and time consuming.

If a couple has entered into divorce proceedings, and one of the parties believes the other is not being forthcoming about the value of assets held in superannuation, they can apply to a family law court registry to request their former partner's superannuation information held by the ATO beginning in April 2022. They will then be able to obtain the most recent superannuation information from their ex-superannuation partner's fund.

What happens to superannuation in the event of a divorce?

Superannuation is handled as any other asset in a divorce and is included in the distribution of assets in a property settlement or financial agreement. The superannuation balances of each individual may stay intact, with each party getting their respective entitlement from the asset pool, or shared between the couple, depending on how the couple's total assets are split.

To divide superannuation, one of the following conditions must be met: a Family Court or Federal Magistrate Court order; or

A superannuation contract (a financial agreement that deals with superannuation interests)

If a superannuation account is divided, it does not convert to cash unless the receiving spouse is beyond the age of 65 or has achieved preservation age and retired. In most situations, the superannuation is promptly transferred to the receiving spouse's superannuation account and remains there until the receiving spouse is legally allowed to withdraw it.

The tax-free and taxable components of a super payment to a receiving spouse will be determined immediately before to the payment, with the relevant payment maintaining the tax components of the account from which the funds are being transferred.

In general, self-managed superannuation funds (SMSFs) cannot buy assets such as residential property from a related person; however, there is an exception where the transaction is the consequence of a marriage split. When a property, such as a residential rental property, is involved, the superannuation laws permit an in-specie rollover according to a court order or financial arrangement rather than forcing the former couple to sell the property.

For example, when a couple has an SMSF, it's typical for one person to stand down when they divorce (until that time, trustees are legally obligated to operate in the best interests of all members).

This same member might later establish their own SMSF and take use of the exemption to get the residential rental property as an in-species rollover.

Capital gains tax relief is also possible when property is given to a spouse's superannuation fund as part of divorce proceedings, so that any prospective capital gains tax does not apply at the time of transfer.

Instead, the spouse or former spouse who gets the asset will essentially 'inherit' the cost base of the asset from the assignee for CGT purposes. That is, when the property is transferred, the tax consequences are often the same as if the receiving spouse or their superannuation fund had owned the property from the beginning.

If you and your spouse have an SMSF and are going to divorce, it's critical to get guidance on the SMSF decisions that must be made and their repercussions.

The superannuation divided

In terms of full-time wages, women earn 14.2 percent less than males. When you account for time, the difference is 16.8 percent. When part-time work is factored in, the ratio rises to 31.3 percent. And the COVID-19 epidemic has further exacerbated the wage disparity.

Given that women take 93 percent of all main caregiver leave, it's hardly surprising that men and women have different superannuation balances when they retire. While the gap has narrowed over time as a result of favorable developments in employment participation and earning potential for women, it is still estimated to be approximately 42 percent.

That is, when a woman retires, she has around 42% less superannuation than a male.

While the situation in SMSFs is substantially better, there is still a gap. Women's average member balances climbed by 28 percent to $654,000 over the five years to June 2019, while men's average balance increased by 74% to $784,000.

The Federal Budget plan to eliminate the $450 barrier on superannuation guarantee payments (the amount someone must earn in a month before an employer is obligated to pay superannuation guarantee) will help lessen the superannuation divide, however it is not expected to take effect until 1 July 2022.

Superannuation equalisation

If a couple has considerably differed superannuation account values but is of a comparable age, there are practical reasons why they might consider bridging the gap.

When one spouse is near to or on the verge of reaching their transfer balance cap (between $1.6m and $1.7m), shifting superannuation payments to the spouse with the lesser balance ensures that they maximize their tax-free income in retirement together. The pair may amass between $3.2 million and $3.4 million tax-free.

You can contribute to your spouse's superannuation fund up to the non-concessional ceiling (currently $110,000, depending on their superannuation balance). If they are under the age of 67, you may be eligible to utilize the bring-forward rule to make up to three years' worth of non-concessional contributions in one year (up to $330,000 depending on their superannuation amount).

If your spouse does not work or has a low income (assessable income less than $40,000), you may be eligible for a tax credit of up to $540 on contributions made on their behalf.

You can divide your superannuation with your spouse if they are under 65 and not retired. Each year, you can transfer up to 85 percent of your concessional superannuation contributions from your employer or salary sacrifice to your spouse's fund.

Actively addressing the worth of each spouse's superannuation account may also aid in the management of some of the challenges that might arise after a spouse dies. While superannuation will always pass to the beneficiary named in the death benefit nomination or estate, it may not necessarily happen in the most practical or tax efficient manner. The superannuation regulations in this area are complicated, especially if there have been previous family splits.

It is critical to obtain guidance to ensure that your superannuation is administered in the best possible way for your beneficiaries. Please contact us right away.

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