Table of Contents

In Australia, superannuation is often one of a couple’s most significant assets, especially as they approach retirement. When couples divorce, superannuation can be split between partners, making it essential to understand how the division works, what options are available, and how to protect retirement savings. While superannuation is not a straightforward cash asset, it is part of the asset pool considered during property settlements, and there are specific rules governing how it is valued and divided.

This blog post outlines what Australian couples need to know about handling superannuation during a divorce, from valuation and splitting options to tax implications and legal considerations.

Understanding Superannuation as Part of the Property Pool

In a divorce, superannuation is treated as a type of property, similar to real estate or cash savings. It is added to the couple’s combined asset pool for consideration in the property settlement, regardless of whether it is immediately accessible.

Key Points:

Superannuation must be disclosed and considered alongside other assets.
Courts can order superannuation to be split, even if only one partner holds superannuation.

Valuing Superannuation in a Divorce

The value of each spouse’s superannuation must be accurately determined before any division. For defined contribution funds, this is often straightforward, as the balance is visible. For defined benefit funds (e.g., some public sector super funds), a complex valuation may be required.

How Superannuation Is Valued:

Defined Contribution Funds: The value is the current balance of the account.
Defined Benefit Funds: These are valued based on formulas that consider future benefits. Expert advice or an actuary may be required for accurate valuation.

Superannuation Splitting Options

Superannuation can be split between separating spouses, but it doesn’t necessarily mean a cash payout. Instead, the portion is transferred to the other spouse’s superannuation fund and remains preserved until they reach retirement age.

Splitting Options:

Transfer to a Separate Super Fund: The non-member spouse can receive a portion transferred to their own super fund.
Establish a New Account: In cases where a spouse doesn’t have a super account, they may need to set one up to receive the split amount.
Keep Super in Original Fund: In some cases, the non-member spouse’s share may remain in the original fund, subject to its rules.

Binding Financial Agreements (BFAs) and Superannuation

A Binding Financial Agreement (BFA) is a legal agreement that outlines how a couple’s assets, including superannuation, will be divided if they separate. BFAs can be made before, during, or after marriage.

Benefits of a BFA:

Clarity and Certainty: A BFA provides clear terms on how superannuation and other assets will be divided, reducing the risk of disputes.
Avoids Court: Couples with a BFA can settle without going through court, which can save time and legal costs.

Seeking a Superannuation Splitting Order

If you and your spouse can agree on how to split superannuation, you can formalise the arrangement through a superannuation splitting order, which can be either consent-based or court-ordered if you can’t agree.

Types of Super Splitting Orders:

Consent Orders: Couples who reach an agreement can apply for consent orders through the court, making the split legally binding.
Court Orders: If agreement isn’t possible, the court can decide how to split superannuation as part of the property settlement.

Factors the Court Considers in Superannuation Splits

When determining a fair split, the court considers several factors, including:

Length of Marriage: Longer marriages with substantial contributions from both partners may lead to more equal superannuation splits.
Contributions of Each Partner: This includes financial contributions, non-financial contributions, and homemaker or caregiving roles.
Future Needs: The court assesses each party’s future financial needs, such as age, health, and earning capacity, to ensure a fair outcome.

Tax Implications of Superannuation Splits in Divorce

Superannuation splits due to divorce are generally exempt from taxes at the time of transfer. However, taxes may apply upon withdrawal if the recipient is under retirement age.

Key Tax Points:

No Immediate Tax: Super splits are not taxed when they are transferred between accounts.
Preservation Rules: Super remains preserved until the recipient meets a condition of release, such as reaching retirement age.
Tax on Withdrawals: When the non-member spouse eventually withdraws the super, it will be taxed according to superannuation withdrawal rules, just as if it were their own super.

Accessing Super Early Due to Divorce

Divorce alone does not permit early access to superannuation. Even if a split occurs, the super remains preserved and can’t be accessed until the legal conditions, such as retirement or reaching preservation age, are met.

Alternatives to Early Access:

Consider other assets that are not preserved, such as savings accounts, to meet immediate financial needs.
In certain extreme cases, early release may be possible on grounds like severe financial hardship, but this is rare and subject to strict criteria.

Understanding Superannuation Death Benefit Nominations in Divorce

After a divorce, it’s essential to update any superannuation death benefit nominations. Death benefit nominations specify who will receive your super if you pass away, and divorce may not automatically revoke these nominations.

Key Considerations:

Review and Update Nominations: Check if you have a binding or non-binding nomination and update it to reflect your wishes.
Binding Nominations: These are legally binding and should be updated after divorce to prevent an ex-spouse from inheriting your super.

The Role of Financial Advisers in Superannuation Splits

Divorce can significantly impact retirement plans, making professional advice crucial in optimising superannuation division and minimising financial loss.

How Financial Advisers Can Help:

Valuation and Strategy: An adviser can help accurately value super accounts, especially with complex defined benefit funds.
Tax and Withdrawal Strategies: Advisers can assist in structuring super splits to maximise tax efficiency and advise on long-term planning.
Guidance on Superannuation Rules: Advisers can explain preservation rules and help set up a super strategy post-divorce.

Alternatives to Superannuation Splitting

In some cases, couples may agree to “offset” superannuation by allocating other assets instead of splitting the super balance. For example, one spouse may retain their superannuation in exchange for the other spouse receiving a larger share of non-super assets, such as property.

Advantages of Offsetting:

Retains Full Super Balance: Allows one spouse to retain their superannuation balance for future growth.
Simplifies the Settlement: Offsetting can be a straightforward approach for couples who prefer not to deal with superannuation splitting logistics.

Considering Future Retirement Needs Post-Divorce

After a divorce, your superannuation balance may be lower, so it’s essential to reassess retirement planning and consider additional contributions to rebuild your retirement savings.

Rebuilding Super After Divorce:

Salary Sacrifice or Personal Contributions: Boost your super by increasing concessional contributions through salary sacrifice.
Government Co-Contributions: Low and middle-income earners may be eligible for government co-contributions, which can help rebuild super faster.
Spousal Contributions: If remarried, spousal contributions may be an option to support retirement savings growth.

Steps to Take After Finalising a Superannuation Split

Once a superannuation split is finalised, take steps to ensure your new financial situation is well-managed and aligned with your future goals.

Post-Split Action Items:

Update Beneficiaries and Estate Plans: Adjust superannuation nominations and wills to reflect your new circumstances.
Review Insurance: Check for life insurance or income protection policies within super that may need updating.
Monitor and Grow Your Super: Develop a superannuation growth strategy to rebuild your balance and support your retirement goals.

Conclusion

Dividing superannuation in a divorce is a complex process that requires careful consideration and, ideally, professional guidance. Understanding the rules around valuation, splitting options, tax implications, and access restrictions can help you make informed decisions and protect your financial future. Working with a financial adviser and a legal professional specialising in family law can further ensure that your superannuation is divided fairly, allowing you to focus on rebuilding and securing your retirement savings after a divorce.