Couples engaged in property settlement negotiations or court proceedings prior to the COVID-19 crisis currently face a difficult choice: should the negotiations be suspended until the crisis ends or should negotiations and property settlement matters continue?
While the value of all assets and liabilities need to be considered, superannuation is an area that has seen considerable volatility. For many people, other than equity in the family home, superannuation is their most important “asset”. Accordingly, while the value of all items of property in a particular matter need to be considered carefully over coming months in the midst of the current turmoil, this discussion centres on the treatment of superannuation and, in particular, accumulation funds.
Currently, the volatility of the share market has directly impacted the value of many superannuation funds. Many funds have significant exposure to shares held on various share markets and, accordingly, the balance of a member’s entitlement will increase and decrease in value in accordance with changes in the share market.
Many superannuation funds have experienced significant fluctuations in the value of their investments since COVID-19 hit headlines. Now, more than ever, it is prudent to obtain financial advice about how to manage your superannuation interests during property settlement negotiations.
While each case is different, some of the factors that may need to be considered in the context of property settlement negotiations, and how you may approach each party’s superannuation entitlements will include:
- How close are you to retirement age?
- Has the value of the fund impacted your expectations about when you will retire?
- Do you intend to withdraw all or part of your superannuation in the next few years and if so, for what purpose?
- What proportion of your asset pool is superannuation?
- How can you structure your property settlement to ensure that you and your spouse share any low or high risk assets equitably?
The main options available in every property settlement case dealing with superannuation include:
- parties may decide to retain their respective superannuation accounts;
- one or both of the superannuation accounts could be split to adjust each party’s superannuation holdings. Superannuation splitting orders can be made either by:
- nominating a “base amount” to be transferred;
- nominating a “percentage” of a particular interest to be transferred; or
- using a formula which may incorporate the value of the superannuation and other matrimonial assets (although formulas can only be used in superannuation agreements and not orders of the Court).
Valuing your superannuation
Before deciding how to deal with superannuation upon property settlement, it is necessary to have an up to date valuation. Most funds allow members to access information about the value of their superannuation in real-time by facilitating on-line access by members to their account. This may be an accurate way to value accumulation funds, however if you or your spouse hold defined benefit funds or your superannuation is in the payment or pension phase, you should contact the superannuation fund for a formal valuation.
Where you have a self-managed fund, you should contact your accountant and obtain advice about the most accurate way of determining the value of the fund for the purposes of property settlement.
Retaining your superannuation
The decision of whether to retain your superannuation or to split some or all of it will depend on many factors.
While parties should always seek independent financial advice in relation to their superannuation entitlements, parties may consider retaining their respective superannuation accounts in a number of circumstances including:
- where the parties are similar ages and have similar balances and retaining their respective superannuation interests equitably shares the risk associated with superannuation currently;
- where the parties are both young and can adopt a long-term strategy in relation to superannuation where you can control your investment strategy with a view to increasing the value by the time you retire;
- where a party may intend to retire in the very near future and are proposing to withdraw funds for a necessary purpose, such as re-housing yourself after separation;
- the superannuation entitlement is not a significant proportion of the overall property pool; or
- a party is prepared to take a risk on the future performance of the fund.
However, particularly if there is a disparity between parties’ respective entitlements to superannuation, a party may prefer to reduce the amount that they retain by way of superannuation having regard to the current circumstances including where:
- the superannuation comprises a significant proportion of the asset pool and, in comparison to the rest of the asset pool, the superannuation interest carries higher risk due to the current volatility of the share market; or
- there may be some time until you intend to retire and it’s appropriate to share the risk of superannuation interests between spouses while also sharing the lower risk assets.
While these are some general factors, as we have noted, parties should ensure that they take appropriate financial advice specific to their situation.
Splitting superannuation
If parties agree or the Court orders a superannuation split, the next consideration is how to give effect to that superannuation split. Again, each case must be considered as against its particular facts. However, dealing with many accumulation funds will include a consideration of the following options.
A nominated base amount
Where couples decide to specify an amount that will apply to the superannuation split, that is known as the “base amount”. Where a base amount is specified, you are generally entitled to that amount plus an increase or less a decrease, reflected in the investment performance of that particular superannuation fund from the operative date until the superannuation split is finalised.
The operative date of the superannuation split will be specified in the order or agreement and is generally the fourth business day after the date upon which the superannuation order or agreement is served upon the trustee of the super fund.
The benefit of a nominated base amount is that the parties know, subject to changes in the value of the fund between the operative date and the date that the superannuation split is given effect to, what amount will be split.
However, what is not known is the proportion that the base amount may comprise as against the total value of the superannuation interest, if the value of that interest fluctuates significantly.
Accordingly, there can be uncertainty as to the value of a superannuation split where the there is a significant change in the investment performance of the relevant superannuation fund in a short period of time. For example, if an agreement has been reached between the parties on 1 February 2020 that the wife is to receive a base amount of $50,000, by the time the order is made and the trustee puts the superannuation into effect on, say 15 March 2020, interest being split may have decreased in value so that the base amount is adjusted to only $45,000. Of course, if the fund increases in value over the same period of time, the base amount will be increased.
Before agreeing to this approach, it is necessary for you to consider the volatility of the investments underlying the value of the fund. That will vary on a case by case basis and depending on the broader market. Historically, most base amounts are adjusted upwards. However, presently, where there is volatility in the value of investments it is entirely possible that the value of a base amount may be adjusted down, and parties should exercise caution to ensure they achieve the intended result.
A percentage split
Where couples decide to specify a percentage that will apply to the superannuation split, the impact of the investment performance of the fund on the operative date will be shared between the parties. In times of high volatility, this method may produce a more equitable outcome, as compared with a split with a nominated base amount.
A formula
Subject to the circumstances of each case, couples may decide, for varying reasons, to include a superannuation split in their property settlement with the amount to be determined by way of a formula.
There are a number of reasons why this might be appropriate including:
- if the relevant superannuation account/s are subject to significant daily fluctuations or both parties have superannuation and it is agreed to split superannuation overall in a particular manner, a formula may be appropriate to ensure an equitable division of assets and liabilities on a particular date; or
- if a non-superannuation asset (such as real estate) is being sold and the sale price is unknown at the time the terms of the property settlement are agreed and the parties have decided that each party is entitled to either a particular amount or particular percentage by way of settlement.
In the current circumstances where the volatility of the market is impacting the value of superannuation on a daily basis, incorporating a formula into a superannuation agreement may be a sensible approach to adopt.
Superannuation splits determined in accordance with a formula can only be documented in a superannuation agreement.
Formalising the superannuation split
It is necessary to obtain the approval of the trustee of the relevant fund to the terms of your superannuation splitting order or agreement, known as providing procedural fairness. Each fund has slightly different requirements and, in order the ensure the property settlement you have reached with your spouse in relation to superannuation is binding and enforceable, you or your legal advisors should provide procedural fairness by providing a draft order or draft agreement to the trustee for approval, prior to the agreement being signed or prior to the court making the order.
What can I do if I don’t get what I bargained for?
In circumstances where spouses have not understood or appreciated the impact of the use of base amount split or a percentage split and have the unfortunate situation of a superannuation fund reducing substantially in value between the date the terms of the agreement is reached and the operative date and the outcome is contrary to what was intended, you should obtain legal advice.
In some exceptional circumstances, it is possible to make an application to set aside an order. However, a change in the value of the superannuation interest between the date of the agreement and the operative date in the current circumstances will, in all likelihood, not form a sufficient basis to set aside an order or agreement particularly where parties are now alive, or should be alive, to likely changes to values in the current climate. Please contact our Family and Relationship law team, should you have any concerns about your superannuation and property settlement during the COVID-19 crisis.