- Divorce, Superannuation and the Gender Divide
- Did your super fund receive a compensation payment?
- What happens to your superannuation when you die?
Divorce, Superannuation and the Gender Divide
New legislation will help prevent superannuation assets from being hidden during divorce proceedings.
From 1 April 2022, the Australian Taxation Office (ATO) will be able to release details of an individual’s superannuation information to a family law court.
The recently enacted laws are designed to ensure that there is procedural and economic fairness in divorce proceedings to prevent the under-reporting of superannuation assets. While a spouse’s superannuation information can be obtained now through legal action, if it is not provided willingly, it is often expensive and time consuming to obtain factual information through subpoenas or court orders.
From April 2022, when a couple have entered into divorce proceedings, if 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. They will then be able to seek up-to-date superannuation information from their former partner’s superannuation fund.
What happens to superannuation in a divorce?
In a divorce, superannuation is treated like any other asset and included in the division of assets in a property settlement or financial agreement. Depending on how the total assets of the couple are split, the superannuation balances of each individual may remain intact with each party taking their respective entitlement from the asset pool, or split between the couple.
For superannuation to be split, there must be:
- An order from the Family Court or Federal Magistrate Court; or
- A superannuation agreement (a financial agreement that deals with superannuation interests)
If a superannuation account is split, it does not convert into cash unless the receiving spouse is aged 65 or over, or has reached preservation age and has retired. In most cases, the superannuation is immediately rolled over into the receiving spouse’s superannuation account and remains there until they are legally able to access it.
The tax-free and taxable components of the super payment to a receiving spouse will be calculated immediately before the payment is made with the relevant payment retaining the tax components of the account the funds are being transferred from.
For self managed superannuation funds (SMSFs), generally an SMSF cannot acquire assets such as residential property from a related party but there is an exemption when the acquisition is a result of marriage breakdown. Where a property like a residential rental property is involved, the superannuation rules allow an in-specie rollover under a court order or financial agreement rather than forcing the former couple to sell the property. For example, where a couple have an SMSF together, it’s common for one member to step down when they divorce (until that point it’s important to remember that the trustees are legally obliged to act in the best interests of all members). This same member might then set up their own SMSF and utilise the exemption to receive the residential rental property as an in-species rollover.
Capital gains tax relief is also available where property is transferred to a spouse’s superannuation fund as a result of divorce proceedings so that any potential capital gains tax does not apply on transfer. Instead, the spouse or former spouse who receives the asset will effectively ‘inherit’ the transferor’s cost base of the asset for CGT purposes. That is, when the property is transferred, the tax implications are generally the same as if the receiving spouse or their superannuation fund owned the property from the time it was acquired.
If you and your spouse have an SMSF together and a divorce is imminent, it’s important to get advice on the decisions that need to be made about your SMSF and their implications.
The superannuation divide
On average, women earn 14.2% less than men based on full time earnings. If you take overtime into account, the gap is 16.8%. When part-time work is taken into account, this figure blows out to 31.3%. And, the COVID-19 pandemic has only worsened the pay gap.
Given that 93% of all primary carer leave is taken by women, it’s not surprising that there is a divide between the superannuation balances of men and women on retirement. While the gap is diminishing over time reflecting the positive shifts in work participation and the earning potential of women, it is currently estimated to be around 42%. That is, when a woman retires, she retires with around 42% less superannuation than a man.
While the situation is much better in SMSFs, a gap remains. Over the five years to June 2019, the average member balances of women increased by 28% to $654,000, however the average balance of a male was $784,000.
The Federal Budget proposal to remove the $450 threshold on superannuation guarantee payments (the minimum amount someone needs to earn in a month before an employer is required to pay superannuation guarantee) will help reduce the superannuation divide, but this is not intended to commence until 1 July 2022.
Where couples have significantly different superannuation account values but are of a similar age, there are practical reasons why they might look at evening out any gap.
Where one spouse is close to or likely to reach their transfer balance cap (between $1.6m and $1.7m), redirecting superannuation contributions to the spouse with the lower balance means that together, they maximise their tax-free income in retirement. Together, the couple can accumulate between $3.2 and $3.4 million tax-free.
You can make a contribution to your spouse’s superannuation fund up to their non-concessional cap (currently up to $110,000 depending on their superannuation balance). If they are under 67 years of age, you might also be able to use the bring-forward rule and contribute up to 3 years’ worth of non-concessional contributions in one year (up to $330,000 depending on their superannuation balance).
If your spouse is not working or a low income earner (assessable income less than $40,000), there is also a tax offset of up to $540 available on contributions you make on their behalf.
If your spouse is under 65 and not retired, you can split your superannuation with them. Up to 85% of your concessional superannuation contributions from your employer or salary sacrifice each year, can be directed to your spouse’s fund.
Actively addressing the value of each spouse’s superannuation account might also help to manage some of the issues that can occur when a spouse dies. While superannuation will pass to the beneficiary nominated in the death benefit nomination or estate, this does not always occur in the most practical or tax effective way. The superannuation rules in this area are complex, particularly when there have been family breakdowns in the past. It’s important to seek advice to ensure your superannuation is managed in a way that delivers the best possible outcome for your beneficiaries.
Did your super fund receive a compensation payment?
Is a financial services compensation payment to your superannuation fund a contribution?
Of late, there have been several compensation payments made by financial services providers to customers that were inappropriately charged or overcharged for insurance premiums or services they did not receive, etc.
New guidance from the ATO helps decipher whether these compensation payments are treated as contributions to your fund. The problem for some people is that where these compensation payments are treated as a contribution to their superannuation fund, they may exceed their contribution cap or attract Division 293 tax (a 15% tax on super contributions imposed on those with combined income and super contributions of $250,000 or more).
In general, the treatment of the compensation depends on who engaged the financial services provider. In general:
- Super fund engaged the financial services provider and compensation paid to the fund – compensation not treated as a contribution.
- Individual engaged the financial services provider and compensation paid to the fund but not at member’s discretion – compensation is a concessional contribution in the financial year it is received.
- Individual engaged the financial services provider and compensation paid to the fund at member’s discretion - compensation is a non-concessional contribution in the financial year it is received
Where neither the member of the fund or the financial services provider had a right to seek compensation, the amount will be a concessional contribution in the financial year it is received by the fund.
If you have received a compensation payment from a financial services provider and the payment means you have exceeded your contribution cap, or are liable for Division 293 tax, there is a potential solution to avoid an adverse impact where you did not have control over the payment. In these cases, you can apply to the Tax Commissioner to exercise his discretion to disregard excess contributions or reallocate them to another year.
What happens to your superannuation when you die?
Superannuation is not like other assets as it is held in trust by the trustee of the superannuation fund. When you die, it does not automatically form part of your estate but instead, is paid to your eligible beneficiaries by the fund trustee according to the rules of fund, superannuation law, and the death nomination you made.
Most people have a death nomination in place to direct their superannuation to their nominated beneficiaries on their death. There are four types of death benefit nominations:
Binding death benefit nomination - Putting in place a binding death nomination will direct your superannuation to whoever you nominate. As long as that person is an eligible beneficiary, the trustee is bound by law to pay your superannuation to that person as soon as practicable after your death. Generally, death benefit nominations lapse after 3 years unless it is a non-lapsing binding death nomination.
Non-lapsing binding death benefit nomination - Non-lapsing binding death nominations, if permitted by your trust deed, remain in place unless the member cancels or replaces them. When you die, your super is directed to the person you nominate.
Non-binding death nomination - A non-binding death nomination is a guide for trustees as to who should receive your superannuation when you die but the trustee retains control over who the benefits are paid to. This might be the person you nominate but the trustees can use their discretion to pay the superannuation to someone else or to your estate.
Reversionary beneficiary – if you are taking an income stream from your superannuation at the time of your death (pension), the payments can revert to your nominated beneficiary at the time of your death and the pension will be automatically paid to that person. Only certain dependants can receive reversionary pensions, generally a spouse or child under 18 years.
If no death benefit nomination is in place - If you have not made a death benefit nomination, the trustees will decide who to pay your superannuation to according to state or territory laws. This will often be a financial dependant to the legal representative of your estate to then be distributed according to your Will.
Is your death benefit valid?
There have been a number of court cases over the years that have successfully contested the validity of death nominations, particularly within self managed superannuation funds. For a death nomination to be valid it must be in writing, signed and dated by you, and witnessed. The wording of your nomination also needs to be clear and legally binding. If you nominate a person, ensure you use their legal name and if the superannuation is to be directed to your estate, ensure the wording uses the correct legal terminology.
Who can receive your superannuation?
Your superannuation can be paid to a SIS dependant, your legal representative (for example, the executor of your will), or someone who has an interdependency relationship with you.
A dependant is defined in superannuation law as ‘the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship’. An interdependency relationship is where someone depends on you for financial support or care.
Do beneficiaries pay tax on you superannuation?
Whether or not the beneficiaries of your superannuation pay tax depends on who the superannuation was paid to and how. If your superannuation is paid as a lump sum to a tax dependant, the superannuation is tax-free. The tax laws have a different definition of who is a dependant to the superannuation laws. A tax dependant for tax purposes is your spouse or former spouse, your child under the age of 18, or someone you have an interdependency relationship with. Special rules exist if you are a police officer, member of the defence force or protective service officer who died in the line of duty.
If your superannuation is paid to your estate, the tax laws use a ‘look through’ approach when superannuation death benefits are distributed to the deceased’s legal representative. This involves determining whether the final recipient of the superannuation is a dependant or anon-dependant of the deceased.
If the person is not a dependant for tax purposes, for example an adult child, then there might be tax to pay.
As always, if you have any questions give the team a call or email anytime Regards,
Adrian De Vito - CPA
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If you have any queries please contact myself or a member of the Clear Accounting Solutions team