Key super splitting requirements often overlooked
Many advisers and trustees overlook some key steps when it comes to super splitting that are “absolutely critical” to ensure a legally effective split, according to an SMSF law firm.
In a contributed blog, William Fettes and Daniel Butler of DBA Lawyers said splitting orders are only the first step in the process of super splitting.
“Splitting orders do not actually implement a split of superannuation. At the risk of oversimplifying, the reason for this is that the SMSF trustee (as a third party to the spousal relationship) is not bound by splitting orders,” Mr Fettes and Mr Butler said.
“The parties will also need to put in place documents to enliven the relevant provisions of the SIS Regulations to implement the split.”
The key steps in the splitting rules require an understanding of a “member spouse” (MS) and a “non-member spouse” (NMS), Mr Fettes and Mr Butler said.
They said an MS is a spouse or former spouse who is a member of the fund and whose superannuation interest is subject to a split which reduces their superannuation benefits, while an NMS is a spouse or former spouse who is obtaining the benefit of a split which increases their superannuation benefits.
In broad terms, super splitting requires a four-step process:
- Step 1 – The NMS serves the Splitting Order on the SMSF trustee together with a notice under reg 72 of the Family Law (Superannuation) Regulations 2001 (Cth).
- Step 2 – The SMSF trustee gives each party a notice, called a “payment split notice”. This notice is the formal notification to each of the parties that the MS’s superannuation interest is to be split under the terms of the Splitting Order.
- Step 3 – The NMS makes a choice regarding how the split is to be implemented (e.g. to create a new interest, roll over the amount or pay a lump sum) and notifies the SMSF trustee of this choice. (A modified process under reg 7A.10 of the SISR applies if the NMS does not make a choice.)
- Step 4 – The SMSF trustee must then give each party a notice that the split has been implemented.
Mr Fettes and Mr Butler emphasised the above steps are absolutely critical to ensuring a legally effective split.
“A purported split that is implemented without enlivening the relevant provisions of the SIS Regulations will be open to legal challenge and could result in contravention of superannuation law (e.g. due to the minimum benefits of the MS being illegally forfeited),” they said.
More super splitting cases due to COVID-19
Mr Fettes and Mr Butler said that due to the COVID-19 global pandemic, there may be many additional stress points affecting married and de facto couples, including employment pressures and financial problems caused by investments losing value and other lifestyle issues associated with social isolation.
As a result, they said it is important that advisers remain alert to the possibility of their clients suffering relationship difficulties, particularly during COVID-19, so that expert advice can be sought where required in the context of a relationship that is about to or has already broken down irretrievably.
“Where a relationship breakdown has occurred, there will be numerous issues for the parties to consider, including how superannuation (which is broadly considered ‘property’ for the purposes of the Family Law Act 1975 [Cth] [FLA]) is to be divided,” they said.
Read the full contributed blog from DBA Lawyers in the upcoming SMSF Adviser Strategy bulletin on 30 May.