In the recent years there has been a growing trend of more Australians separating later in life, often after decades spent building substantial assets and most notably superannuation balances. According to the Australian Taxation Office, average super balances for those over 75 have grown 59% to $525,000 over the past decade. As those balances grow, and as more wealth passes between generations, superannuation is becoming a commonly contested asset in both family law and succession disputes.
However, many people remain confused about how superannuation is treated once a relationship ends or a person dies, due to its unusual position in Australian law. Superannuation is treated as property to be divided in a family law settlement, but when it comes to succession law it is treated very differently, as it does not automatically form part of a person’s estate. In family law, it is most common for superannuation disputes to arise from:
- Competing claims from spouses as to how much superannuation can be split to former spouses
- How to split a Self Managed Superannuation fund under provisions of the Family law Act in a tax effective way.
How the Family Court treats superannuation
When couples undergo a separation or divorce, whether between a married or de facto couple, superannuation is treated by the Family Court as property, and it is included in the asset pool. The courts then deal with it through the same five-step process the court applies to any other asset.
Parties may decide to keep their own superannuation entitlements, or they can agree to split a “base amount” or percentage of the superannuation to the other spouse by way of Court Order or Binding Financial Agreement.
However, what surprises many people is that this treatment does not carry over once a person dies. Superannuation does not automatically form a part of a deceased person’s estate, which means a will has no automatic say over how it is distributed.
Succession law and the death benefit trap
Family law determines how superannuation is treated between living parties, but on death, an entirely different body of law takes over. Most people assume their will directs where all their assets go, including their superannuation, but in reality, unless there is a valid binding death benefit nomination or other governing mechanism, it is the trustee of the superannuation fund, acting under superannuation law rather than the will, who decides who receives the death benefit.
This is why we encourage clients going through a separation to treat their superannuation nomination as part of the separation process itself, not as an afterthought once property and parenting arrangements are resolved. Reviewing a binding death benefit nomination is one of the simplest and most overlooked steps a separating client can take. They can also consult with a Wills and Estates lawyer about this nomination.
Under Victoria’s Wills Act 1997 (s 14), for example, divorce automatically revokes any gift, appointment, or power given to a former spouse in a will, unless a contrary intention is shown. No equivalent rule exists for binding death benefit nominations. If a client separates, or even finalises a divorce, and never updates their nomination, their former spouse can still receive the entire death benefit exactly as nominated. The nomination does not correct itself the way a will partially does. For de facto couples, the gap can be wider still, since most state Wills Acts have no equivalent automatic revocation on the ending of a de facto relationship, so a will made during the relationship can continue to benefit a former partner indefinitely, just as an unreviewed nomination can.
While Industry Superannuation funds can be valued easily under Family Law Act 1975, provisions, funds such as Defined Benefit Schemes (some public service or Defence Force superannuation falls into this category) may require a specialised actuarial valuation. Superannuation Pensions may need to be split, and overseas super may need to be recognised. You may need a specialist family lawyer to recognise these features.
Self-managed super funds (SMSFs)
Self-managed superannuation funds present a particular challenge during separation, as both parties may be trustees of the same fund or there may be a corporate trustee. Both parties may have member balances that need to be divided or extricated in a formal legal agreement. The strict Superannuation Industry (Supervision) Regulations (SIS regulations) which apply to self-managed funds can be breached by unsuspecting members or spouse members. This leads to a “non- compliant” super fund.
In Thurston & Loomis [2016] FamCA 318, the parties had withdrawn most of the funds from their self-managed superannuation fund to finance a property development registered in one party’s name, in breach of the SIS rules, which restricts the extent to which an SMSF’s asset may be used outside commercial, arm’s length dealings. Justice Forrest ordered that the withdrawn amounts be treated as loans, repayable with interest at a rate approved by the ATO and directed the independent accountant to report the arrangement to the Tax Office.
The case illustrates a practical risk for separating couples with an SMSF where they are not aware of the impact of breaches. Where one party has used or borrowed fund assets for their own benefit during the relationship or separation, that conduct may need to be accounted for as part of the property settlement, and the breach rectified before property settlement orders can be made. Getting advice from an accountant who specialises in Self Managed Super funds is important to ensure that breaches don’t occur or subsist. Specialist Family lawyers also need to recognise these potential issues.
Protecting your superannuation
There are practical steps that can reduce the risk of disputes:
- Binding death benefit nominations should be reviewed after separation, not just wills
- For SMSF members, proper accounting advice is required to ensure the fund is compliant with SIS rules. Superannuation is no longer an asset people can set and forget, particularly for those with self-managed funds or those separating later in life with substantial balances. Reviewing both estate planning and superannuation nominations, and seeking advice early where an SMSF is involved, can help avoid disputes before they arise.
- Specialist Family lawyers may be required in the case of settlements with SMSF’s or splitting orders for more complex funds such as Defined Benefit Funds or pensions.
At Nicholes Family Lawyers we have the expertise to guide you through this process, or manage the issues arising on separation, so please do not hesitate to contact us on 03 9670 4122 for further guidance.