Superannuation Legislation: Protecting your financial interests under Family Law
They are property issues and superannuation. Superannuation Legislation for many years was not property under the Family Law legislation and the Court had no power to deal with it although the Court, to overcome this difficulty, made an adjustment to a party’s interests and in some cases extreme adjustments to compensate a party for the loss in the other party’s superannuation. The classic examples for high adjustments related to people in professions or employment where there were large superannuation interests such as airline pilots, politicians, and public servants.
The Cases under Superannuation Legislation
Many of the cases involved, for example, airline pilots who had superannuation entitlements in excess of $300,000 and the only other property was the matrimonial home with a net interest of say $150,000, the home being the only substantial asset of the parties. If you go back to the ’80s and 90’s those amounts were extremely high amounts especially in Brisbane. Of course, today such interests could relate to a normal family law situation. The Court was powerless to make any orders in regard to the superannuation entitlements of the husband and the wife would only end up with a substantial interest in the smaller asset base of the house. The husband would retain his high superannuation entitlements and high income and, in most cases, received a small property component to assist him to re-establish himself.
In family law, this has changed, and superannuation is now deemed to be an asset and can be dealt with by the Court. Initially not so in de facto or same-sex relationships which were governed by state legislation in the Property Law Act which Wayne Goss the Premier of Queensland at the time introduced with little fanfare just prior to Christmas in 1999. A very smart move on his part as there was opposition from some sections of the populous to prevent any legislation being introduced in these situations. With all the fanfare of Christmas, it was not picked up by the media to any large degree. I remember it quite well because at the time I was a member of an advisory group to the coalition parties and part of the issues with which we were dealing were those very issues and how to draft legislation that would appease the more conservative elements of the National Party.
Wayne Goss snuck his Act in under our very noses and extended the ambit of the legislation to cover not only same-sex relationships but to all relationships be it same-sex or otherwise, for example where a grandmother and grandson resided together and had accumulated joint property.
Property Law Amendment Act No 89 of 1999
Section 260(1)A “de facto spouse” is either one or of two persons, whether of the same or the opposite sex, who are living or have lived together as a couple. (ii)4 Subsection (1) – (a) two persons are a couple if they live together on a genuine domestic basis in a relationship based on intimacy, trust, and personal commitment to each other.
Dictionary definition of intimacy – the state of being intimate.
– closely acquainted familiar, close (an intimate friend – an intimate relationship)
– promoting close personal relationships
– a very close friend
In 2008 legislation in similar terms was introduced into the Family Law Act and the Federal Family Court now has jurisdiction in relation to such issues.
However, the State legislation still stands and is relevant to all relationships except marriages in which your clients may be involved if the relationship ended prior to 2008.
For whatever reasons the State de facto legislation for want of a better word did not apply to superannuation. The State Act is closely based on the Family Law Act and the principles applied by the State Courts are very similar to those applied by the Family Court in relation to marriage apart from considerations which the Family Court can now give to superannuation.
So how does this relate to you? Nearly half of all marriages be their first marriages, second marriages or heaven forbid third marriages to end in divorce. So, there is a good chance that one in every two married couples will split up.
I am not sure of the figures relating to de facto couples, but I believe the divorce rate, for want of a better term, is even higher in these relationships.
In regard to your single clients, what happens if they subsequently form a relationship and how will that affect them as far as their assets are concerned. Should they enter into a marriage or a de facto relationship how would their assets be affected if that relationship split up?
Many couples engage Financial Advisers to provide financial advice one would assume on the best methods of accumulating wealth taking into consideration the investments they should make, the assets they should acquire, the most appropriate structuring to do this which would minimize any taxation liabilities.
They possibly do this on the basis that if they are single, they will remain single, or if entering into a relationship they will seek further advice and if married or in a de facto relationship they will remain in that relationship.
What happens to their assets if the parties separate? Is the careful planning of their financial structuring put asunder? They may agree in those circumstances, that their assets will be divided between them in a certain manner, but such agreement has no meaning or effect unless put in the proper format. The agreement, unless it complies with the current legislation, may not be recognized by any Court be it State or Federal and the assets will be divided as the Court determines which in many circumstances could be quite disastrous.
The Division of Assets by The Family Court
The Family Court first ascertains if a division of the assets would be just and equitable. If the Court determines that a division should be made the Family law, then works on the principle of firstly ascertaining what the net asset pool is as a result of a relationship. The net asset pool comprises assets which a party may have owned prior to the relationship and those acquired during the relationship. It also comprises the assets brought in by their partner and those acquired by their partner during the relationship. The Court firstly ascertains the gross asset value and then deducts all liabilities giving a net asset value base. The liabilities could also include those liabilities brought into the relationship by a party or their partner. The Court then ascertains the contributions of the parties towards the acquisition and improvement to the gross asset base. This means that the Court looks closely at the assets brought into the relationship by a party and their liabilities and the assets brought in by their partner and their partner’s liabilities. The Court then determines whether or not the assets a party brought into the relationship were applied towards the acquisition of or improvement to the gross asset base and will then make an apportionment of the net assets based on the parties’ contributions. The value of the contributions made by a party to the assets of the relationship does diminish with the passage of time and the Court will give consideration to this.
After making the initial determination the Court then looks at the future financial positions of the parties under Section 75(2) of the Act. These factors could include the ages of the parties, their ability to maintain employment, the incomes they can earn, and whether the parties have children of the relationship or otherwise who are dependents and are supported by that party. After looking at all these considerations and other considerations under Section 75(2) the Court can make a further determination on the distribution of the net asset base and could increase the percentage interest of one party in the assets on the basis of the principles set out under Section 75(2) of the Family Law Act.
After giving consideration to all these matters the Court can then make a further distribution of the assets on the basis of a just and equitable distribution of assets depending on the circumstances of each case.
If you relied on the Family Law Act the abovementioned principles would come into place. There is great uncertainty as to how the assets would be distributed on this basis. The parties of course have little said or control over how the assets will be apportioned between them. On a financial planning basis, this may greatly disadvantage a client.
So, what can be done to protect these assets should a split occur?
The agreements a party can enter into change the principles under the Family Law Act. The agreements set out the basis of the distribution of the assets should there be a separation in their relationship. The parties to the agreement are bound by the terms of the agreement once it has been signed by them and the terms of the agreement then take full force and effect subject to certain qualifications.
Dealing with married couples and those entering into marriage, the parties are able to enter into financial agreements under section 90 of the Family Law Act. Most parties, when they consult lawyers about financial agreements are considering entering into a relationship be it marriage or a de facto relationship. They are interested in protecting their own assets and ensuring that they can pass on those assets to their children and family law. It is interesting to note that there is a great interest in professional women who have accumulated assets and are considering marriage. I draft many agreements for these professional women. Women seem to be more concerned with the protection of their assets than most males. In the case of males, many males, seeking to enter into agreements, have already been through a separation or a divorce and have had a disposition of their assets to their detriment. They are more concerned about entering into binding agreements when considering second marriages to protect the assets that they have.
This relates to women and men entering into de facto relationships as well.
How can a Financial Agreement assist you?
I will go through the normal terms of a financial agreement but bear in mind that a financial agreement can be varied during the course of the relationship if circumstances change and if the terms of the agreement require variation. The agreements can be varied from time to time. There are certain requirements for such variations to make them binding. The financial circumstances of parties will change over a lengthy period of time and any agreements entered into at an earlier time, may require further consideration and amendment.
In regard to any relationship be it marriage or a de facto relationship, financial agreements under the provisions of the Family Law Act can be entered into when contemplating a relationship, during a relationship, after a separation, and in the case of marriage after divorce.
The requirements of the legislation in regard to financial agreements are quite stringent and certain certificates which I will refer to are required to be entered into by the client and their solicitor to make them binding. There is a high onus on the parties to make full disclosure of their assets. Financial Advisers no doubt you have full knowledge of those assets. There is a high onus on the Lawyer giving advice and drafting the agreements to ensure that the parties fully understand the terms of the agreement that they are entering into. The agreements can quite drastically change the rights they may have under the Family Law legislation and the legislation has endeavored to ensure that the parties are fully aware of the rights that they give up when entering into these agreements.
However, it is to a party’s advantage to determine the manner in which they are going to maintain or divide their assets. They may have structured the management of those assets upon receiving financial advice and may wish to maintain those assets if the unthinkable happens and they separate. Their assets can be distributed to their greatest advantage and to obtain the best taxation benefits possible.
The agreements under the Family Law Act must have schedules attached to those agreements fully detailing the assets of the parties at the time of entering into the agreement. Now that is a simple matter if they are receiving financial advice, as no doubt the Financial Adviser will have full details and schedules of the assets of their client and their investments. This should be an easy requirement to fulfill under the act. The parties must ensure that they do make full and frank disclosure of their assets and if the parties are contemplating an agreement and must ensure that they are fully aware of each other’s financial standing so that the provisions of the act can be complied with. If they have not complied with these requirements, then there are grounds for overturning the agreement in which case the principles applied by the Court will apply.
The financial agreements of course have recitals giving the history of the relationship and the acquisition of the assets during the period of that relationship. It records that the parties are giving up their rights under the Family Law Act and that their rights are to be determined now by the terms of the agreement they are entering into. It is acknowledged in the terms of the recital that they are fully aware of their legal obligations and of the necessity to make full and proper disclosure.
The agreement, which is most often drafted for parties, is in the following terms. As I said earlier the terms of the agreement can be changed and adapted to suit the parties’ financial position as they progress through their lives. Again, there are specific requirements for doing that of course but normally parties enter into an agreement in the following terms:
Assets owned prior to the relationship
This deals with assets owned by the parties prior to the relationship. Normally these assets remain separate property and the dealing of the parties with that property during the relationship will not alter that ownership. The investment of funds, say on the sale of the property, owned by a party will remain that party’s investment unless otherwise agreed. However, a Financial Adviser may advise the client otherwise if for any reason such as a taxation advantage the adviser believes it would be in his / her clients’ interest.
Superannuation Legislation for Employee
This deals with superannuation and employee benefits. Normally under the terms of the agreement, the party who has those entitlements will maintain those entitlements.
It is more beneficial now under the new legislation for parties to maintain their superannuation interests, which was not as advantageous prior to the present changes. The terms of the agreement will allow parties to have the maximum benefits of their superannuation. Of course, the parties can, if they wish, divide their superannuation by superannuation Legislation agreements in whatever manner they deem fit. One party may acquire an interest in the other party’s superannuation fund. Of course, the legislation does not allow any payment out of the entitlements or benefits unless the parties are entitled because of age or otherwise to such payments.
Property acquired after the commencement of a relationship
Again, agreements can deal with these issues.
The parties may acquire a property. Financial Advisers may advise them on the best means of doing this bearing in mind taxation implications and structuring. The Agreement can cater to these provisions to suit the advice that the adviser may be giving. The property can be held in the parties’ own names or jointly or in any structure such as a trust or company or in any other entity which best suits the management and acquisition of those assets and investments.
Normally the Agreement states that, where the property is acquired jointly and where there is no specification as to how that property is held or what the parties’ interests are in that property, the parties will hold equal ownership in such property. Of course, if realty is acquired, parties can purchase that as either joint tenants, which gives them equality of interest in that property and which passes upon the demise of a party to the other party, or as tenants in common where it can be specifically stated how the interests of the parties are held and in what percentages.
There is normally a specific term under this section of the agreement that notwithstanding any other provision in the agreement the party’s may during the relationship alter or vary their ownership in the property held by them allowing the other party to acquire an interest in such property. Such alteration or variation will be set forth in writing and signed by the parties, in which case the parties will hold an interest in such property in accordance with the terms of the subsequent agreement signed by them. There will be no alteration or variation to the property rights of the parties pursuant to the terms of an agreement unless the subsequent agreement is evidenced by the parties in writing.
Each party’s liabilities normally remain that party’s responsibility now and in the future. Again, this can vary. There may be guarantees or taxation implications which could vary this situation;
The parties if they so wish can include in the Agreement any lifestyle provisions such as:
- Maintaining separate bank accounts and not intermingling their investments in those accounts;
- The sharing of the household expenses and how they are to be paid;
- Maintaining a life tenancy in a property upon the death of his/her partner;
- Any other such provisions that they feel are necessary.
The parties can include terms in the agreement if they so wish, that upon the birth of children, the wife will be entitled to and acquire a greater interest in the property than that set out in the initial agreement. There may be a provision in the agreement, subject to the qualification of the legislation which I will deal with, enabling the wife to receive financial assistance or spousal maintenance from her spouse during the period of her pregnancy and the caring of the child prior to the wife returning to the workforce. Any provisions in this regard can be recorded and those provisions will come into effect if certain things take place such as the birth of children. Financial Advisers are able to give a lot of consideration to this to ensure that the provisions are best suited to their client and again taking into consideration taxation implications and so forth.
Division of assets and liabilities
The agreements normally then deal with the division of property and liabilities upon the termination of the relationship and or divorce. Normally the division of the property will be in accordance with the ownership of the parties in the assets as stated in the body of the agreement. However, should it be better on advice, for say the husband to acquire the full shareholding in a company and to continue the management of the company, then that can be dealt with under this section of the agreement. In those circumstances, of course, there may need to be some consideration for compensating the wife for the loss of interest in that entity and again ensuring that the division of the assets is to the best financial advantage of the parties concerned. There are tax implications that arise, for example where company property is transferred to a party such as a motor vehicle or other assets owned by the company. In these circumstances, there could be significant fringe benefit taxes that apply.
Sale of property
Under the provisions for the division of property, there is normally a provision for the sale of the property so that one party can not unreasonably refuse such sale should it be in the best interests of the parties to sell such property.
It may be in the interests of the parties to obtain advice from their financial advisers, taxation specialists such as accountants or legal advisers on the taxation implications which may arise on the division of property after a divorce. I have mentioned the fringe benefit implication. There may be other implications that apply. These must be given consideration to at the time of entering into the agreement. As the taxation implications vary from time to time, parties may need ongoing advice in regard to this and perhaps the terms of the agreement will need to be varied to fit in with those changes.
The agreements deal with the maintenance of the parties being spousal maintenance. There are limitations to this, and these are as follows:
The legislation is not clear as to whether or not a party is prevented from applying for spousal maintenance after entering into a Financial Agreement and after separation in their relationship. Where the Agreement specifically limits or restricts the rights of a party to apply for spousal maintenance at all or at a particular time or in particular circumstances then, although the financial interests of the parties are clearly defined, it is not certain as to whether or not a party in those circumstances could apply for spousal maintenance after separation in the marriage. To create certainty in regard to this it may be necessary to define the spousal maintenance to be paid should a separation occur.
Section 90F of the Family Law Act states:
- No provision of a Financial Agreement excludes or limits the power of a Court to make an order in relation to the maintenance of a party to a marriage if:
- The court is satisfied that, when the Agreement came into effect, the circumstances of the party were such that, taking into account the terms and effect of the Agreement, the party was unable to support himself or herself without an income-tested pension, allowance or benefit.
It is clear:
- The assessment of the ability of a party to support themselves without an income-tested pension, allowance or benefit takes place not when the Agreement is made, but when it takes effect.
In regard to child maintenance (child support), terms can be inserted in a Financial Agreement for this but such terms must meet the requirements of division 2 of part 6 of the Child Support (Assessment) Act 1989. Effectively a child support provision in a Financial Agreement can only set out on a temporary basis the child support obligation of the payer. Once a child support assessment is made, any child support provision in a Financial Agreement ceases to have an effect and is unenforceable.
In regard to child maintenance, it may be in a party’s interest to establish a Child Maintenance Trust to pay for the ongoing child maintenance for the children of the relationship. For this to be accepted, it must be a genuine trust established for the children. The trust will normally hold property which generates an income to pay for the financial support of the children. This means that a party may be giving away interests in property which would then become the property of the trust. It would be very difficult for a party to retrieve such property when the children for example are adults and are self-supporting. The property will remain trust property with the children as beneficiaries. The parties would need to be high wealth people to obtain any advantages in this regard.
The agreements normally state that the parties forego any claim in the estate of the other party. The agreement does not prevent either party from making any voluntary disposition to or for the benefit of the other party if they wish to do so, as long as that disposition is recorded in writing, say for instance in a will.
Primary Dispute Resolution
The agreements normally require the parties to attend on primary dispute resolution prior to taking any legal action under the terms of the agreement.
Statements of independent legal advice
As stated, the parties are required to sign statements of independent legal advice stating that they were provided with full advice from a legal practitioner on the effects of the agreement and their rights under the agreement. The legal adviser is also required to sign a certificate of independent legal advice saying that he has fully advised the client in regard to these matters. Because of the stringent requirements in regard to this, I always ensure that the advice I give to clients is in writing. This provides documentary evidence of the advice being given which helps prevent any claim being made by a party to the agreement that he or she did not receive proper advice which could constitute a ground for setting the agreement aside.
Setting aside agreements
A financial agreement can only be set aside under Section 90K of the Family Law Act or its equivalent for de facto relationships if and only if the Court is satisfied that:
- The agreement was obtained by fraud (including non-disclosure of a material matter); or
- The agreement is void, voidable or unenforceable; or
- In the circumstances that have arisen since the agreement was made it is impracticable for the agreement or part of the agreement to be carried out; or
- Since the making of the agreement a material change in circumstances had occurred (being circumstances relating to the care, welfare and development of a child of the marriage) and, as a result of the change, the child or, if the applicant has caring responsibilities for the child as defined in subsection 2 of the Act, a party to the agreement will suffer hardship if the Court does not set the agreement aside; or
- In respect of the making of a financial agreement a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable.
If there has been full disclosure and honesty by the parties in entering into the Agreement, then it would be extremely difficult for the agreement to be set aside.
Termination a Financial Agreement under Superannuation Legislation
Parties can terminate a financial agreement in two ways either by including a clause to that effect in another financial agreement they enter into or making a written agreement known as a termination agreement.
The role of financial planners
Financial planners should make their clients aware that there may be a possibility of their clients’ relationship ending and of the consequences should that occur and the benefits of entering into a financial agreement to best protect their interests.
It is best to plan for the possibility of a separation and for the redistribution of assets should that occur and to provide for the most appropriate restructuring should that be necessary to maintain the maximum benefit for investments.
Financial agreements provide certainty and avoid the high emotional and financial costs of litigation should a separation occur.
Financial agreements provide a relatively simple means for parties to share their superannuation benefits and entitlements should a separation occur in their relationship.