Superannuation and relationship breakdown

How your super is affected if your marriage or relationship breaks down.

Overview

If your relationship with your spouse ends, you should be aware of what can happen to the super entitlements of you both.

The Family Court and super-splitting laws generally enable super interests (accounts in super funds) or super payments (pensions or annuities) to be split by agreement or court order if a relationship breaks down.

There are options for splitting super depending on whether you are the member or non-member spouse of the super fund that reports this information to us.

The ATO may be able to provide information to the family courts on the assets of the other party in family law proceedings where there are concerns that they have not fully disclosed.

A spouse is a person who lived with you on a genuine domestic basis in a relationship as a couple (whether of the same or different sex). This includes a de facto relationship – you do not necessarily need to be legally married.

How super is treated

Superannuation is treated as property under the Family Law Act 1975 but differs from other types of property because it’s held in a trust.

Where the super interest can be split under superannuation law and the super fund rules, the parties can finalise their superannuation entitlements and obligations as part of their settlement, rather than waiting until the member spouse retires.

How an interest in a super fund or a super payment will be split between the member and non-member spouses may be specified by a court order or a superannuation agreement negotiated as part of a financial settlement.

Options for splitting super assets

If the fund’s rules allow it, the non-member spouse can open a new super account for themself in the same fund. If not, the fund can transfer or roll over the interest to another fund in the non-member spouse’s name.

If a non-member spouse meets a condition of release, they may be able to access their interest immediately in the form of a super benefit.

The tax-free and taxable components of the super interest or super payment is calculated immediately before the interest split or payment and divided between the split interests or payments in the same proportion.

If an income stream has started

If the member has set up a super income stream that has started to be paid before the relationship breakdown, a super agreement or court order can split the income stream.

In most cases, the income stream would be commuted into a lump sum (due to the governing rules of the fund) and the non-member spouse paid their entitlement under the agreement or court order. The fund would pay the rest to the member spouse either as either a lump sum or a reduced super income stream.

If the fund pays the non-member spouse’s entitlement as a super lump sum, they will treat it as a separate lump sum benefit for the non-member spouse. If it is paid as a super income stream, they will treat it as a separate income stream for the non-member spouse.

If the income stream is unable to be commuted, or fully commuted, to a lump sum due to the fund’s governing rules, both spouses will receive an income stream. The split will result in two regular payments from the same income stream – one to the member spouse and one to the non-member spouse.

Transfer balance cap consequences of splitting super

Splitting an income stream can also have transfer balance cap consequences for both the member and non-member spouses. You may need to notify ATO of a pension split to manage your transfer balance account.

If the member spouse has started to receive a super income stream before the relationship breakdown, a superannuation split can result in the non-member spouse receiving a lump sum amount or a percentage of member spouse’s super income stream benefits.

Most income streams are in the retirement phase and will count towards the individual’s transfer balance cap. Splitting a retirement phase super income stream can have transfer balance cap consequences for both the member and non-member spouse. To manage your transfer balance account, you may notify ATO in writing on a Transfer balance event notification form. This split affects the transfer balance account for both spouses.

If the payment split is achieved by the member spouse fully or partially commuting the income stream to pay the non-member spouse a lump sum amount, a debit will arise in the member’s transfer balance account, which their fund will report to ATO. If the non-member spouse chooses to use that lump sum amount to start a super income stream, a transfer balance credit will arise in the non-member’s transfer balance account, which their fund will report to ATO.

Tax consequences of splitting super

If the non-member spouse creates a new super interest in the member spouse’s fund, any super benefits subsequently taken by the non-member spouse from the new super interest are taxed according to the current rules for member benefits.

The tax consequences of splitting super on a relationship breakdown are:

• super lump sum and income stream payments are taxed to the two parties separately
• the proportion of the taxable and tax-free components in the member spouse’s existing super interest is applied equally to the amount retained by the member spouse and the amount transferred the non-member spouse
• your total super balance is affected by the amount you received (or lost) from the split
• for the non-member spouse, this may affect your ability to contribute to super in the future
• for the member spouse, this may bring you under thresholds, allowing you to make further contributions again.

Self-managed super funds

The same options for splitting super apply to members of self-managed super funds (SMSFs). However SMSF trustees (who are also typically fund members) are also responsible for ensuring the SMSF complies with a superannuation agreement or court order, subject to a member’s directions on what fund their interest is to be rolled over to.

Super splitting and relationship breakdown may mean you need to restructure or wind up your SMSF. The option of continued membership of the SMSF after a relationship breakdown will depend on the SMSF’s trust deed.

Trustees must also ensure the SMSF continues to meet all its legal and reporting obligations while giving effect to a super splitting order or agreement. This includes meeting requirements to implement super splitting imposed on trustees under the Superannuation Industry (Supervision) Act 1993 and its Regulations.

As trustee, you have control over and responsibility for your fund’s investment decisions. You also must manage the fund’s legal responsibilities and always act in the best interests of all members.

Trustees can acquire assets from a related party of a SMSF because of a relationship breakdown

The usual prohibition on acquiring assets from a related party do not apply where the acquisition occurs as a result of the relationship breakdown of a member of the fund.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.