Super and divorce

Almost three years after the law was changed to allow the Family Court to split a divorcing couple’s superannuation, lawyers, accountants and other professional advisers are still waiting for clear guidance on how this will be done.

A decision handed down earlier this year, which many had hoped would provide such guidance, resulted in a 3:2 decision in which the minority judges voiced strong dissent. That decision (C v C) saw the majority depart from previous authority and provide a new approach, of sorts. Before this decision, the courts typically accepted that superannuation should be treated like other property such as the matrimonial home, cars and other hard assets.

In C v C, the majority ruled that super should, if possible, be treated separately from other property. Their view was that it should be valued separately and that individual contributions made by the parties should be taken into account. Although not a major change in approach, the decision has left many lawyers and academics arguing about which approach is best.

What is clear from the decision is that the Family Court is now giving superannuation much more attention and greater consideration than previously. One consequence of this is that the individual contributions that husbands and wives have made to super are being examined more carefully.

As super continues to become a bigger component of couples’ finances, it is likely to play a major part in future property settlements. The Family Court’s scrutiny of individual contributions will take on particular significance from January 1, next year, when the Federal Government allows people to split all or some of their contributions with their spouses.

These changes will enable a high-income spouse (typically the husband) to contribute to their low-income spouse’s super fund, thereby taking advantage of the tax thresholds of two funds rather than one.

Couples who are tempted by the tax benefits that these changes will create should bear in mind that the courts have the discretionary power to change their interests in their super funds when a marriage breaks down. The principles that the courts use in assessing contributions to superannuation and making orders to split superannuation are every bit as broad and general as those that apply to all other property.

One certainty that C v C does provide is that the discretionary powers of the Family Court must be taken into account when people are packaging their income to take advantage of the tax benefits of making contributions to a spouse’s superannuation fund. In particular, the court will continue giving credit to high-income spouses who make such contributions, and low-income spouses (typically wives) will not necessarily be permitted to retain all of their accrued entitlements if the marriage crumbles.

This means that high-income spouses should not feel unduly threatened in a financial sense if they contribute to their spouse’s superannuation, and low-income spouses should not assume that their superannuation is untouchable. In many cases, a husband who has contributed to his wife’s super fund will be entitled to some of its accruing benefits.

Stuart Barr heads the family law division at Melbourne law firm Mason Sier Turnbull.