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What do the Federal Government amendments to the Family Law Act mean for Superannuation?

Superannuation and Family Law In 2002 there were amendments to the Family Law Act which allowed superannuation to be treated as property. The Court was empowered to make Orders splitting superannuation entitlements, transferring entitlements from one party to the other. Of course, the splitting of a person’s superannuation entitlement and a transfer of that entitlement […]

What do the Federal Government amendments to the Family Law Act mean for Superannuation?

What do the Federal Government amendments to the Family Law Act mean for Superannuation?

Superannuation and Family Law

In 2002 there were amendments to the Family Law Act which allowed superannuation to be treated as property. The Court was empowered to make Orders splitting superannuation entitlements, transferring entitlements from one party to the other. Of course, the splitting of a person’s superannuation entitlement and a transfer of that entitlement does not mean that the person receiving the benefit of that entitlement could immediately draw down on the interest received. The normal provisions for drawing down on superannuation would. Under the legislation, if a splitting Order was made then one person would obtain an interest in the other person’s superannuation fund. A party could retain that interest in the fund or roll it out into a fund of their own choosing.

Prior to 2002 and the reason why this legislation was introduced into the Family Law Act was that in many cases married couples have had small property interests but large superannuation entitlements. At this time, the Family Law Act only applied to married couples. For instance, a person’s employment may have entitled that person to the benefit of a large superannuation fund such as airline pilots. As well parties to a marriage may have salaries sacrificed their income into their superannuation fund thereby creating a large superannuation interest. The remaining assets may have been meager. The Family Court prior to 2002 did not have the power to deal with superannuation which meant that one party would walk away with a large suppuration interest and the other party would only have a small interest in the remaining assets of the marriage. If a party was retiring in the near future then the Court had powers to prevent a party from dealing with their superannuation entitlements and when that party retired, the Court could then make Orders for monies to be drawn down from the superannuation fund and paid to the other party. This created difficulties in enforcing such Orders. For these reasons, the Family Law Act was amended to enable the splitting of married couple’s superannuation funds.

The legislation was further changed in 2009 which enabled de-facto couples and same-sex couples to have the same rights as a married couple under the Family Law Act. This allowed them to also have the benefit of the change in legislation enabling the splitting of their superannuation funds.

The Recent Federal Budget Made Changes

The recent federal budget made substantial amendments to superannuation which greatly affect separating parties. What is even more alarming, is that this legislation affects divorcing couples who suffer emotionally and financially when there is a breakup in their relationship. The legislation of the Government makes this far worse.

The Federal budget has made substantial difficulties with changes to its superannuation policies. Pursuant to such changes the maximum amount a person can put into a superannuation (non-concessional contributions – after-tax dollars) is $500,000.00 per member of a fund and pursuant to the legislation this is a lifetime limit that becomes effective from the budget night of 03 May 2016.

Prior to the changes being made a person’s limit was $540,000.00 every three (3) years (if that person was under 65 years of age) or $180,000.00 per year. Many people took advantage of the legislation as it then was to contribute $540,000.00 every three (3) years is the maximum allowed at that time. If such contributions were made then the entitlements of that person now exceed the newly introduced lifetime cap. If the total amount paid into super exceeded the $500,000.00 after the date of the budget then that person is now required to draw down the excess paid into superannuation cannot contribute any more non-concessional contributions to his/her fund. There would no penalty in drawing down the amount required. Once the limit of $500,000.00 has been paid into a superannuation fund, then no further non-concessional contributions can be made.

Further, the limit on the allowable before-tax concessional contributions is to be reduced from $30,000.00 to $25,000.00 per year from July 2017.

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Because the Family Law legislation allows for the splitting of superannuation funds, many couples now separating may lose the ability to replace the entitlements in their fund if a splitting Order is made by the Court.

Because of the changes to the superannuation legislation, people in a relationship, after separation will find it harder to rebuild their superannuation if a splitting Order has been made on their fund.

Are there ways to protect yourself from the Superannuation Changes?

Alarm Bells are ringing – Nicole Pedersen in a cent article suggests 4 ways of minimizing the impact:

  1. Split your pre-tax super contributions equally in marriage – the main goal may be to equalise balances so, as a family, pay in and amass as much as possible under the proposed stringent limits. Contribute as much as concessional – salary sacrifice – contributions as you can for a lower-earning spouse (from July 2017 it’s planned you’ll no longer have to do this through an employer).
  1. Equalise your pre-tax contributions in marriage – if you and your spouse have unequal balances, you could also use the once-a-year opportunity to help even out balances by splitting concessional contributions paid into the higher balance account across to the other spouse’s super. Under the super splitting rules, you can move up to 85 percent of contributions into the other spouse’s account.
  1. Split your post-tax contributions equally in marriage – this way, in the event of a subsequent relationship breakdown, neither spouse loses the right to make future non-concessional contributions. When making after-tax contributions progressively over time, share them between accounts. Also get freebies and tax benefits via after-tax spouse contributions (attracting up to a $540 tax rebate if, from July 2017, your spouse earns under $37,000) and a $1000 annual non-concessional contribution (to get the government’s co-contribution of up to $500 into the fund of someone earning under $50,454).
  1. Split your super equally on divorce – possibly the only way to ensure both parties still have some capacity to rebuild their super if they have the money to do so. We’ll need to see the legislation to know if divorcees will be disadvantaged.

 

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