Determining the best splitting approach ahead of increasing complexity in super splits

A splitting order can specify an amount (or formula for determining such an amount) that is payable to the NMS. This is where a base amount approach can be determined in advance and interest accrues and is payable on this amount up to the time of payment, transfer or rollover.

As an alternative to the base amount approach, splitting orders can also provide for a “percentage interest split”. Under this approach, the superannuation interest is generally divided by specifying a percentage of the member’s splittable interest that is to be paid to the NMS.

Speaking at the recent DBA Lawyers webinar, senior associate William Fettes said the most appropriate splitting method for a couple sharing an SMSF on a relationship breakdown depends on a range of factors that advisers can be aware of when weighing in the options.

He noted the base amount is often a go-to where the parties can come to an agreement on what is the split amount that has been gained by the non-member spouse. In this situation, if that can be agreed in advance, so the base amount approach becomes common because it seems more definite.

“When you agree to that amount in advance and then subject to when the operative time is set in the orders, you then have prescribed interest that applies on top of the base amount split. But you’re going to get that amount split if you’re the non-member spouse, whether that’s a fixed amount that’s actually a dollar figure or, in some cases, it’s done by reference to a formula.”

The interest is based on a rate that is 2.5 per cent above the percentage change in the original estimate of full-time adult ordinary time earnings (AOTE) for all persons in Australia, as published by the Australian Bureau of Statistics during the year ending with the February quarter immediately before the beginning of the adjustment period (i.e. AOTE + 2.5 per cent). 

Mr Fettes said this varies from year to year, where currently for the 2020–2021 financial year it is at 5.7 per cent, so that adds more flavour for the base amount approach.

But in regard to percentage split, that is where you may not have an agreed amount but you’ve got an agreed percentage, and Mr Fettes noted that is going to operate on the member spouse’s interest in favour of the non-member spouse at the time that it is implemented.

“So, unlike the base amount which is sort of locked in, linked up to the operative time, you generally have the percentage amount that applies to the percentage of the relevant member spouse’s interest at the time that is actually carried out,” he said.

“It’s a bit more of a moving feast, and because of that, there’s sort of more things that go along with that in terms of valuations, such as interim financial statements or management accounts that might be required to be prepared to figure the relevant time of the split.

“Whereas with the base amount, you sort of come into an agreement and you might actually need to get those valuations and so forth done to get a clear picture more in advance of signing up to those orders.”

If the fund was going to shoot up significantly in value between potentially when the orders might be signed and when the fund might be carrying out the split, Mr Fettes said there might be more upside if you’ve got a percentage split drafted in there in comparison to a base amount depending on the prescribed interest rate.

“It’s quite a difference and sometimes you have both, so it’s important to appreciate that they’re not mutually exclusive. Sometimes we see arrangements where it’s complicated to calculate the base amount split that would be agreed upon,” he explained.

“Sometimes what might happen is you’ve got a husband and wife and as a preliminary step there might be a 100 per cent interest split from one spouse to the other to sort of stack the deck all the way on one side and then a base amount split back to the spouse, who has had all this super neutralised for the purposes of the first step and then they get a base amount split back.

“Otherwise, you’re juggling how much is being split in favour of the non-member spouse plus what are the non-member spouse’s existing entitlements that they have when considering their own account balance.”