Tag: Property Division

When a couple separates or divorces, or a de facto relationship[i] ends, a property must be divided. The property includes all of the assets – houses, cars, jewelry, furniture – and all of the liabilities, like loans and mortgages.  Superannuation – the money individuals set aside to have when they retire – is now also included in those assets that need to be divided fairly between a couple, whether married, de facto heterosexual or de facto same sex.  In the past, superannuation was considered a financial resource, similar to salary or other income. Today, however, most couples weigh superannuation funds as if they are marital assets or property.

Part VIIIB of the Family Law Act, 1975 (FLA) covers issues dealing with superannuation and families. The law requires that the superannuation benefits due to one spouse or de facto partner must be divided with the other spouse or partner. But there are several difficulties with dividing superannuation. Firstly, if a couple divorces before retirement, the superannuation funds are not yet available. So while a couple may divide up their property at the age of 45, they may not see funds from superannuation for another 20 or 30 years.  Other problems…..

The law recognizes these problems and offers three ways a divorcing couple can divide superannuation interests.

1. “Split”.  The first method is to split the interest into two accounts or benefits. This can be done either by a payment split when the superannuation becomes due (say, at retirement) or through an interesting split, which means each partner receives a superannuation interest. With an interesting split, the partner receiving the new benefit can keep the money in the original account until it comes due, or open an entirely new account. Nobody receives an actual cash payment – the money remains in a superannuation fund.  Tax issues must be calculated before the payment or interest is split.
2. “Flag”.  The second approach to dividing superannuation is to flag the benefit for a later date. In this scenario, the couple marks the benefit and the trustee of the superannuation fund is not allowed to touch it until the “flag” is lifted, either by agreement of the parties or with a court order.  The couple can then decide what happens to the fund only later after the person who owns the superannuation account retires.
3. Leave it alone.  In this case, couples consider superannuation a financial resource. When dividing up their assets, superannuation is only included in the calculation as a source of income, not as an asset.

Splitting the Superannuation Now

Typically, divorcing couples split their superannuation. Most couples choose this approach because it enables them to know exactly how much money they are receiving and allows them to make a clean break, without having to return to financial issues ten, twenty or thirty years later.

There are several steps needed to split the superannuation:

Step 1:  Request information from the partner’s superannuation fund.  

 There are two forms that a spouse must submit to the trustee of the superannuation fund:

1. Form 6 Declaration, which proves to the trustee that you are entitled to see the information and
2. the Superannuation Information Request Form. These forms can be obtained online

You must be “eligible” to receive the information from the fund.  An eligible person is:

1. The member of the fund or
2. The spouse of the member of the fund or
3. If (1) or (2) died, the deceased person’s legal representative or
4. Someone who plans to enter into a superannuation agreement with the member

Step 2: Evaluating information from the superannuation fund.  

The law requires the fund to provide information to the member of the fund and his or her spouse. The fund may provide information regarding the value of the superannuation or information that helps the person requesting information determine the value of the fund. The trustee should also notify the requester whether or not the fund may be split.  Once this information is obtained, the numbers must be calculated using specific formulas, depending on the type of fund. An expert in family law or accounting can help determine the correct formula to use in order to obtain the correct amount of interest each party is entitled to from the superannuation.

Step 3:  Turn to the courts for an order.   

Couples may sign their own splitting agreement and take it directly to the trustee of the superannuation fund. Alternatively, couples can turn to the courts with their own financial agreement already signed. Finally, if a couple can’t agree, they may obtain a court order.

1. If both sides agree about the value of the fund and it’s division, they can submit an Application for Consent Orders, which includes their agreement regarding superannuation. This agreement is binding only if both parties signed it AND both received independent legal advice.  This is the case regarding all financial agreements between couples divorcing.
   

   De facto couples terminating their relationship may also submit a financial agreement regarding superannuation, but only if they were residents of New South Wales, Victoria, Queensland, South Australia, Tasmania, the Australian Capital Territory, the Northern Territory or Norfolk Island when the agreement was made.

2. If the parties cannot come to their own agreement, they may turn to the court for Orders.

In either case, the trustee of the fund must be notified that the court is being asked to give orders. This is to ensure that the request being made complies with the fund’s rules. Also, the trustee is entitled to attend the court hearing and oppose the orders.

Step 4: Send a copy of the agreement or court order to the superfund trustee. 

Once the court gives orders, the superannuation fund must be sent a sealed copy of the decision.

Step 5: Split the superannuation benefit. 

Generally, the superannuation benefit will be split into two funds, one for each partner. There may be administrative costs for splitting the fund.

[i] Laws on the splitting of superannuation do not apply to de facto couples from Western Australia.

This article is designed to address the tax consequences of certain divorce-related actions, such as spousal maintenance and property division. This area is very complex and nuanced, and while we will provide a broad framework for the tax implications related to divorce, should you need specific information or have questions about your situation, please consult your lawyer or a tax specialist. In fact, we advise that you consult a tax adviser even in straightforward cases, just so you will not experience any unexpected tax consequences.

Maintenance Exemption and Deduction

Maintenance payments are exempt from the receiver’s income tax if the payments are made to a person who is or has been a spouse of the one paying maintenance, to or for the benefit of a child of the payer, or to or for the benefit of a child of the other party to the marriage. This exemption extends to maintenance received by a de-facto spouse, as well. The general rule is that there is no tax assessed on maintenance received.

The exemption will only apply to payments attributable to the maintenance payer – and not in situations where the payer makes the payments to divest himself or herself of an income-producing asset or to divert ordinary income that would otherwise be taxable. Essentially, the exemption will not apply if the payer is not acting improperly.

With regard to deductions, the maintenance payer may not deduct maintenance payments from his salary or wages; spousal maintenance may not be claimed as a tax deduction.

Property Division

The tax that is sure to rear its head in the property division area is the capital gains tax. Capital gains taxes are triggered upon the happening of a capital gain event, which can be a gain or a loss of assets. There are more than 50 events enumerated in the Income Tax Assessment Act (ITAA), and they range from the disposal of a capital gains tax asset to the grant of an option or lease.

Certain assets and transactions are exempt from the capital gains tax, including vehicles (that carry less than 1 ton and hold less than nine passengers), trading stock, and the disposal of a life insurance policy by the original beneficial owner of the policy. The right to payment from a superannuation fund or other approved deposit fund is also excluded from capital gains tax.

Capital gains and losses related to the dissolution of a marriage or de facto relationship are exempt from capital gains tax.

The law also provides for certain roll-over relief for transfers between spouses. For instance, if your former spouse transfers an asset with capital gains tax attributes, the roll-over relief allows you to take it as the transferor had it (with the same capital gains tax attributes). Additionally, if an asset was a personal use asset to the transferor, it will be considered a personal use asset to the transferee as well, and special rules apply to calculating capital gains for these assets.

There are specially carved out rules with regard to dwellings and capital gains taxes. Particularly if the main residence is used for business purposes as well – in this case, a special exemption to capital gains tax will apply.

Superannuation, specifically the splitting of superannuation, carries its own tax implications. For instance, if one surrenders their rights to payment out of this type of fund, the capital gains tax provisions will not apply. Additionally, when dealing with splitting certain tax concessions like roll-over relief can apply. Moreover, certain public sector funds will even have untaxed elements or other schemes not subject to tax.

With the lengthy list of exemptions and complexity of capital gains tax law, sometimes it is necessary to make decisions as to how you and your spouse plan to treat certain capital gains tax assets. For instance, you will have to decide which dwelling will be considered the main residence, or you may choose to nominate multiple dwellings as the main residence. These choices you make will certainly have tax implications and thus should be decided prior to any transfer. Typically parties agree to these choices by signing a statement prior to transferring the property but bear in mind that once a choice has been made, it is binding and cannot be changed or altered later.

Legal costs can also result in tax implications. They are considered in part of a capital gains calculation as incidental costs related to the disposal or acquisition of a capital gains asset. These costs should be considered separately from the asset and should be treated differently. Additionally, money spent on legal or tax advice might be deductible under the ITAA.

Property Orders

The court is given broad discretion with regard to property orders and has the power to alter property interests as it sees fit. However, the court is to consider the implications of capital gains taxes that will arise if a party is forced to dispose of property by order of the court.

Certain exemptions and concessions under capital gain tax law may be available if a property order causes a capital gains tax event to occur. For instance, an order requiring the transfer of property may trigger the marriage breakdown roll-over relief provisions.

As you can imagine the tax implications that can arise through divorce are boundless. The law is very complex; this article is merely intended to give you an idea of the implications and consequences so you may be prepared to address these issues with regard to your specific situation.