Law firm flags ‘common pitfalls’ in super splitting process

One of the issues that often arises is the failure to properly describe the intended mechanics of the split, explained Mr Fettes.

“I’ve seen formula approaches where the stated formula doesn’t work or it doesn’t actually achieve the intended outcome,” he said.

“If you you’re going to be doing some sort of fancy thing like having a base amount that’s based on a formula, you really need to have regard to the formula being workable. It is a very careful legal exercise to draft orders or a superannuation agreement, so you should get some expert input to ensure it is actually functional because I have seen things that just don’t operate properly.”

Mr Fettes said he has also seen drafting orders that focus heavily on the split amount but disregard the fact that the non-member spouse, or beneficiary of the split, still has their entitlements in the fund post split. 

“So, they've gotten a top up, but then the fact that they still have their own entitlements in the fund has been disregarded,” he said.

“That has to be factored in and dealt with as part of the process. It would generally not be advisable to deal with a split amount and then leave the non-member spouse with their own entitlements in the fund. You wouldn’t typically recommend two former spouses sharing a fund on an ongoing basis.”

Issues can also arise, said Mr Fettes, where the SIS regulations are not given any consideration as part of the drafting exercise of the splitting orders.

“You really need to have regard to what the superannuation regulations require in the way of steps. Essentially, the regulations require an exchange of various notices and the making of a choice by the non-member spouse for it to be all done properly under superannuation law,” he said.

“It's really important that that's actually contemplated and addressed in the splitting orders.”

Mr Fettes said he has also seen splitting orders that refer to the wrong part of the Family Law Act.

“We [sometimes] see superannuation agreements that refer to the wrong part of the Family Law Act, which is really about court orders or vice versa,” he cautioned.

“The Family Law Act has changed over time so we also sometimes see references to provisions that no longer exist because they’re been repealed and replaced.”

Where those sorts of mistakes happen, Mr Fettes warned that this can undermine the legal effectiveness of what is intended.

Problems can also occur where there are failures in relation to the operative time concept, said Mr Fettes.

“The operative time period in many cases is going to be defined as the beginning of the fourth business day after service. However, if you’ve got orders, there is potentially some flexibility for determining a particular operative time based on what you need,” he explained.

“If there's multiple splits happening, usually the first split is a particular operative time with the second split happening immediately after for the purposes of the operative time so you have an operative time per split.”

The operative time is very important, he said, as it fixes the time from which interest starts to accrue under the prescribed adjustments to the base amount.

Mr Fettes also pointed out that with a superannuation agreement there is no flexibility for determining the operative time as the Family Law Act has a specified regime for operative time.

“Essentially you're locked in there, so if you depart from that, you've probably got an invalid attempt to deviate from the prescribed legislative operative time. So again, that's not going to hold up and could be a cause of dispute or contestation between the parties,” he said.

“So, it's important to be aware that you don't have that flexibility in relation to superannuation agreements.”

Mr Fettes noted that the operative time concept is of less significance for percentage splits.