Superannuation on Marriage Breakdown: A Work in Progress
FEDERAL MAGISTRATE JUDY RYAN
INTRODUCTION
1. The Family Law Legislation Amendment (Superannuation) Act (2001) (Cth) came into effect in December 2002. It introduced a new Part VIIIB into the Family Law Act 1975. At the same time the Family Law Superannuation Regulations 2001 became operative. The legislative amendments allow a court exercising jurisdiction under the Family Law Act 1975 to make a new range of orders affecting superannuation entitlements under the Act. The Family Law Superannuation Regulations 2001 provides the machinery for the operation of the scheme, including provisions relating to the valuation of superannuation interests
and the mechanism for splitting superannuation once an order is made.
2. Prior to the introduction of Part VIIIB of the Family Law Act 1975 superannuation was treated as a financial resource, not as property. By section 90MC "A superannuation interest is to be treated
as property for the purpose of paragraph (CA) of the definition of matrimonial causes in section 4". This gives effect to the objects of Part VIIIB set out in section 90MA, "To allow certain splittable payments in respect of a superannuation interest to be allocated between the parties to a marriage, either
by agreement or by court order". Although the orders are made in accordance with Part VIIIB, the orders are made pursuant to section 79. This means that the court cannot make an order under section 79 in relation to a superannuation interest except in accordance with this part. It also means that the court must determine the allocation
of superannuation by reference to section 79(4), section 75(2) and section 79(2).
3. Importantly, the new part enables the courts to make orders, which have the effect of splitting superannuation entitlements or
otherwise making orders, which are binding, on trustees of the superannuation fund. The court is given power to bind third party
trustees without the third party trustee being joined to the proceedings. Trustees of superannuation funds are thus in a special
category whereby the reach of Part VIII of the Family Law Act 1975 extends further than it can with other third parties. See Ascot Investments v Harper (1981) FLC 91-000.
4. The three pivotal features of the new scheme are thus:
- Superannuation is treated as property.
- The regulations mandate valuation methodology in most circumstances.
- The court has power to bind third party trustees without the third party trustee being joined.
5. In this paper I aim to take practitioners through a stepped process concerning applications to a court for the adjustment of property
which involve superannuation interests. Superannuation is a work in progress and in this area in particular practitioners need to
keep a close watch on published decisions and the outcome of applications by trustees for fund specific valuation methodology.
Hickey & Hickey & Attorney General for Commonwealth of Australia
6. This case is essential reading as it underpins practice and procedure as well explaining the operation of the new scheme. In Hickey & Hickey & Attorney General for Commonwealth of Australia [2003] FamCA 395 the Full Court determined a case stated by Chisholm J on an application that he make section 79 consent orders. The proposed orders provided that the husband receives nett assets of approximately $104,000 and the wife approximately
$174,000. The wife had superannuation worth approximately $25,000 in an accumulation interest in the growth phase and the husband
had an accumulation interest in the growth phase superannuation worth approximately $10,600. Neither party sought a splitting or
flagging order and the minutes of proposed order ended with a commonplace catch all that, "except as otherwise provided in these orders the husband and wife each be declared the sole legal and beneficial owner of all items
of property or resource including money, motor vehicles, insurances, equities, superannuation entitlements and personal effects currently
in the possession or control of each of them respectively".
7. The parties did not file any evidence concerning the value of their respective interests in superannuation pursuant to section
90MT(2) of the Act. The Full Court asked twenty-one questions, some of which it considered unnecessary to answer. Those it did answer
are as follows:
Answers to questions stated for the opinion of the Full Court
Question 7: Does section 79 grant the power to make a declaration in relation to property?
Answer: Yes, particularly having regard to the provisions of section 80. Where the court makes an order, which alters the interest of a party or parties in property, that order may include a declaration
in relation to certain of their property.
Question 8: If section 79 does grant the power to make the declaration in relation to property, should the court make it?
Answer: Yes, in so far as it is desirable in the circumstances of the particular case. However, as a matter of law it is not necessary in
so far as it does not purport to alter an interest.
Question 9: Does section 79 and/or section 90MS grant the court power to make the declaration in relation to superannuation?
Answer: Yes. A provision such as paragraph 5 of the terms of settlement in a section 79 order may include the superannuation order.
Question 10: If section 79 and/or section 90MS does grant the power to make the declaration in relation to superannuation, should the court make it?
Answer:Yes, insofar as it is desirable in the circumstances of the particular case. However, as a matter of law it is not necessary insofar
as it does not purport to alter an interest.
Question 14: If the court should otherwise make a declaration under section 79 and/or section 9MS in relation to superannuation, must the court make a determination under section 90MT(2) before making the declaration?
Answer: No.
Question 16: If the court should otherwise make the declaration the section 79 and/or section 90MS in relation to superannuation, must the court be satisfied that the trustee of any relevant superannuation interest
has been accorded procedural fairness before making the declaration?
Answer: No.
Question 20: If section 79 does grant the court the power to make the declaration in relation to property can the jurisdiction be exercised by a Registrar relying
upon Order 36A Rule 2(m) of the Family Law Rules?
Answer: Yes.
Question 21: If the court is able to grant the declaration in relation to property and/or the declaration in relation to superannuation and/or
the declaration in relation to resources, what other principles should it apply in considering whether to do so?
Answer: Depending on the circumstances of each individual case, the principles to be applied by the court in making order by consent pursuant
to section 79 are identified in Harris v Caladine [1991] HCA 9; (1991) FLC 92-217.
Hickey is of fundamental practical importance to the preparation of applications for orders, whether or not they are made by consent, where
the parties have superannuation interests, whether or not those interests are being split or flagged.
STEP ONE: DOES PART VIIIB APPLY?
8. The legislation has no retrospective effect. This means that parties who finalised the adjustment of property pursuant to section
79 orders or a section 87 agreement prior to the legislation becoming operative are deprived of the opportunity to adjust superannuation
reliant upon the amendments. That is unless, the section 87 agreement or section 79 orders are set aside. If the parties have entered
a binding financial agreement, which may or may not include a superannuation agreement, the court does not have jurisdiction to make
section 79 orders.
9. Because the superannuation amendments had a long gestation period, there are numerous cases where courts have exercised power pursuant
to section 79(5) to adjourn property proceedings until after the legislation became operative. In some localities where superannuation
was effectively the only valuable resource acquired during the marriage, parties adjourned their section 79 application for many
years until it was anticipated that the superannuation interest would vest.
10. Section 5(2) of the Family Law Superannuation Act 2001 provides, "Subject to subsections 3 and 4 the superannuation amendments do not apply to a marriage if a section 79 order, or a section 87 agreement,
is in force in relation to the marriage at the start up time". Subsections 3 and 4 relate to setting aside section 79 orders or section 87 agreements. The issue that arises for consideration is
the consequence of exclusion of interim orders from the definition of section 79 orders, but no mention being made of partial orders.
Essentially, if when adjourning the matter a partial property order was made is this an order captured by section 5(2) of the Family
Law Superannuation Act 2001? Although one could be forgiven for having previously regarded the distinction between an interim property
order and partial property order as a sterile debate, it now justifies further consideration.
11. Prior to the 1983 amendments to the Family Law Act 1975, Nygh J concluded that there was no power to make an interim property order. See Burridge [1980] FamCA 89; (1980) FLC 90-902. However, he was satisfied that the court could make "in effect, a permanent order …limited to a portion of the property". In 1983 section 79 was substantially amended when section 79(5),(6) and (7) were added. In Harris v Harris (1993) FLC 92 – 378 the Full Court of the Family Court analysed the meaning of interim and partial property orders. At page
79, 929 the Full Court said:
"The distinction that Nygh J drew in Burridge between an interim and a partial order appears to be that the interim order is one which
operates until the final hearing, but may then be submerged into the final order. Whereas a partial property order complete in itself,
but dealing with part only of the property and not intended to be a final determination of the proceedings.
We do not doubt that the Court has power in a proper case in s79 proceedings to make what may be conveniently described as an interim order, that is an order dealing with some of the property of
the parties prior to the final hearing. We do not consider that it is necessary to draw a distinction in terminology between an interim
order and a partial order.
12. Harris was subsequently discussed in Bassi and KD Sales Force Specialists Pty Ltd [1999] FamCA 1352; (1999) FLC 92-867. The Full Court emphasised that Harris did not decide that there is no distinction as identified in Burridge between interim or partial property orders or "that it is inappropriate to draw it in a proper case" at 86,265. Relevantly the court also held:
"The Court's power, under s79(6), to make property orders where it makes an order under s79(5) adjourning proceedings to await the occurrence of a significant financial event such as the receipt of superannuation, is not confined
to making "interim" orders. By that sub-section it may make "such interim order or orders or such other order or orders (if any)
as it considers appropriate with respect to any of the property of the parties to the marriage or either of them."
13. Thus, pursuant to section 79(6) a court may make either an interim or partial property order. It is worth noting that in Carson when exercising its own discretion on appeal, the Full Court ordered the transfer to the wife of the husbands interest in the home
and release from a mortgage by way of interim partial property adjustment. There the source of power was clearly section 79(6). Both Harris and Bassi were decided prior to the Family Law Legislation (Superannuation) Amendment Act 2001. Section 5(2) of the Family Law Legislation (Superannuation) Amendment Act 2001 may result in the Full Court giving further consideration to the interim or partial order dichotomy. Ultimately the key difference
may be whether the source of power is the Part VIII enabling provisions found in section 80(1)(h) or (k) as relied upon by Nygh J in Burridge (supra) or alternatively section 79(6). The former is only activated by the exercise of a primary
power in Part VIII. See Smede & Smede [2002] FMCAfam 295.
14. Pursuant to section 79A(1A) the parties may agree to vary or set aside any section 79 orders, including interim or partial orders.
If there is an unanticipated difficulty it may be able to be rectified by an application to amend the orders pursuant to the slip
rule. This does not require consent. Most orders will have resulted from negotiations which resulted in a concluded agreement. Presumably
the process of negotiation in most cases is well documented and confirmed by an exchange of correspondence. The correspondence may
well set out the parties agreement and assist you to persuade a court that there was an error in drafting capable of rectification
pursuant to the slip rule. The relevant law in has been recently summarised by the Full Court of the Family Court in the matter of
Milham v Stanford [2001] FamCA 294; (2001) FLC 93-073. The Full Court gives a very helpful review of the decided cases and included in the reasons is a statement of the operation of the
rule by McHugh J, in Storey and Keers Pty Limited v Johnson (1987) 9 NSWLR 466 at 453 where his Honour said: "The rationale of the slip rule also requires that an omission or mistake should not be treated as accidental if the proposed
amendment requires the exercise of an independent discretion or is a matter upon which a real difference of opinion might exist:
cf Brew v Whitlock (No 3) (at 506) In general the test of whether a mistake or omission is accidental is that applied by Lord Hershall
in Hatton v Harris (at 558.) If the matter had been drawn to the court's attention would the correction at once have been made."
15. The rule is clearly one that is very wide in its scope. In paragraph 23 of the Full Court's decision their Honours quote His Honour
Kirby J's summary of the operation of the rule for Family Court purposes in DJL v Central Authority [2000] HCA 17; 170 ALR 659 at 685 where His Honour held: "Some accidental slips or omissions are capable of correction at common law. [Ainsworth v Wilding [1896] UKLawRpCh 42; [1896] 1 Ch 673 at 677 per Romer J; R v Cripps; Ex parte Muldoon [1984] QB 686 at 695] This facility is now commonly replaced by provisions in rules of court. In the Family Court of Australia, that is where the
'slip rule' may be found. [Family Law Rules O 31, r 6] Ordinarily, it is limited to correction of the formal record for accidental
mistakes or omissions of no substantive significance. Similarly, when it can be shown that a court order does not correctly reflect
the court's decisions as contained in its reasons, rectification of the order is viewed as nothing more than a mechanical task. [Rajunder
Narain Rae v Bijai Govind Sing (1839) II Moo Ind App 181 at 216, 222-3; [1839] EngR 1215; 18 ER 269 at 282, 285 per Lord Brougham; Ainsworth v Wilding [1896] UKLawRpCh 42; [1896] 1 Ch 673 at 677; Thynne v Thynne[1955] P 272 at 313] Thus where a party has been wrongly named or misdescribed [Thynne v Thynne [1955] P 272 at 314] or is shown to have died or to be non-existent [MacCarthy v Agard [1933] 2 KB 417 at 427] corrections may be made. Where, without alteration, it is possible to repair an oversight and prevent injustice by making
a supplementary order, the existence of a previously perfected order will be no barrier. [Preston Banking Co v William Allsup &
Sons [1894] UKLawRpCh 207; [1895] 1 Ch 141 at 144; Bailey v Marinoff [1971] HCA 49; (1971) 125 CLR 529 at 540]."
STEP TWO: PRESENTING AN APPLICATION FOR A SPLITTING OR FLAGGING ORDER
16. Having decided that the provisions of Part VIIIB apply, practitioners must then obtain information about their clients, or their
client's spouse's superannuation. Section 90MZ(B) allows certain persons to apply to the trustee of a superannuation fund for information
about the superannuation interest of a member of the fund. The persons who can ask for the information are:
- A member of a superannuation fund;
- The spouse of the member, or
- A person who intends to enter into a superannuation agreement with the member.
17. The application must made using the prescribed form. A form for this purpose is set out in Schedule 1 to the Family Law Superannuation Regulations 2001. A client who is an eligible applicant may instruct a solicitor to receive information disclosed by a trustee under section 90MZ(B).
The trustee may require more from a solicitor than merely a letter indicating that the solicitor acts on behalf of an eligible applicant.
For abundant caution the solicitor should obtain a written authority from the eligible applicant to obtain information pursuant to
the subsection, which authority is provided to the trustee. This will avoid delay and unnecessary expense.
18. The next step requires careful consideration of the section 79 orders that will ultimately be sought. Armed with the response
from the trustee, the solicitor must decide whether it is likely that the party should seek to adjust property including an order
splitting superannuation. Even where the client seeks to have the adjustment of property by reference to all of the available assets
and hopes to obtain orders whereby the other party will take their entitlement by reference primarily to superannuation assets, the
practitioner should seriously consider obtaining a valuation of superannuation. Because the valuation methodology is prescribed,
it is cost effective and thus desirable that the parties agree upon who should conduct a valuation and have a single expert complete
it. Such an agreement should be documented and it may even be wise to have the agreement noted by the court or reflected in a consent
order.
19. It would be unwise for practitioners to conclude that merely because the prospects of settlement are reasonable and unlikely to
involve a superannuation splitting order, that the practitioner need not consider advising the client to obtain a valuation of a
relevant superannuation interest. If the fund is an accumulation fund it may be appropriate to work from recent member statements
and/or the form 6 as a reasonably reliable guide to the value of the superannuation interest pursuant to the regulations. However,
the same cannot be said of a defined benefit scheme or self managed fund. The latter will require valuation by an accountant. In
many cases one would expect to see the valuation equating to the capital assets held by the fund. Valuation of defined benefit schemes
are complex and I am unable to think of any factual circumstance that would safely result in a practitioner advising against obtaining
a valuation of such an interest. Where there are a number of interests, including one or more that are below the splittable superannuation
interest threshold (currently $5,000) practitioners should be bear in mind that the court may order a party to roll over smaller
unsplittable interests into a larger fund, thereby making the entire sum amendable to a superannuation splitting order.
20. Practitioners will need to ensure that they are appraised of determinations for fund specific valuation methodology under regulation 38 and 43A of the Family Law (Superannuation) Regulations 2001. Usually both the Family Court and Federal Magistrates Court web sites notify the outcome of these applications. Formally these determinations
are notified on the following web site. http://scaleplus.law.gov.au/html/instruments/0/80/top.htm
21. Having determined the valuation of the interest, if a splitting order is contemplated the practitioner must decide the style of
order that will be sought. Many trustees have designed their own preferred suite of orders. Speak to the trustee and establish if
they have done so. If they have you must decide whether these orders suit your clients needs. Set out below are a series of orders
that practitioners may wish to utilise or adapt.
18.1 Whenever a splittable payment is payable in respect of the superannuation interest of (name) in the (name of superannuation fund):
(a) (name of non member spouse) is entitled to be paid an amount calculated in accordance with the regulations, using a base amount
in the sum of (amount $) at the operative time of (date).
(b) There is a corresponding reduction in the entitlement of the person to whom the splittable payment would have been made. but for
this order;
(c) The above is entitled to be paid the amount (if any $) calculated in accordance with the regulations by reference to a figure
of (per cent) %; and
(d) There is a corresponding reduction in the entitlement of the person to whom the splittable payment would have been made but for
this order.
18.2 (Name) is declared to have no interest in any interest in any superannuation fund in the name of (Name).
18.3 (Name) is declared to have sole right, title and interest in any interest in (his/her) name in any superannuation fund.
18.4 In respect of any superannuation interest of (name) in the (super fund) must not make any splittable payment without the leave
of the court and must notify the court in writing within (no.) of days of the next occasion a splittable payment becomes payable.
18.5 (Member's name) is restrained from giving the trustee of (super fund) a binding death benefit nomination in favour of any person
which would have the effect of in any way reducing the value to the (name of non- member) of the splitting order made in order number
(X) made (date/today).
18.6 (Member's name) must indemnify (name of non-member) in respect of any loss suffered as a result of failure of (member's name)
to comply with the preceding order.
18.7 On or before (date) (member's name) must instruct the trustee of the (super fund) to pay him/her a lump sum from the (super fund)
upon his/her retirement and (member's name) is restrained from giving instructions to the trustee of the (super fund) to pay him/her
a pension on his/her retirement from the (super fund).
PROCEEDURAL FAIRNESS
22. If a superannuation splitting or flagging order is sought, section 90MZ(D) applies. If the parties intend to address superannuation
issues in the form of a superannuation agreement neither section 90MZ(D) nor mandatory valuation methodology applies. For a good
discussion of superannuation agreements read "Super splitting on marriage breakdown" by Watts, Bourke and Taussig QC published by
CCH Australia. Section 90MZ(D) is in the following terms:
(1) An order under this Part in relation to a superannuation interest may be expressed to bind the person who is the trustee of the
eligible superannuation plan at the time when the order takes effect. However:
(a) in the case of a trustee who is not a secondary government trustee-the court cannot make such an order unless the trustee has
been accorded procedural fairness in relation to the making of the order; and
(b) in the case of a secondary government trustee:
(i) the court cannot make such an order unless another trustee of the eligible superannuation plan has been accorded procedural fairness
in relation to the making of the order; and
(ii) the court may, if it thinks fit, require that the secondary government trustee also be accorded procedural fairness.
(2) If an order is binding on the person who is the trustee of an eligible superannuation plan at the time when the order takes effect,
then the order is also binding (by force of this subsection) on:
(a) any person who subsequently becomes the trustee of that eligible superannuation plan; or
(b) in a case where section 90MUA applies-a person who is the trustee, or any person who subsequently becomes the trustee, of the
new ESP.
23. If the court is only making a declaration in respect of superannuation notice of the relief sought is not required. See Hickey, where the Full Court held, "If the superannuation interest is not to be altered in accordance with Section .90MT(1) although the superannuation interest is to
be treated as property for the purposes of s.79 the provisions of part VIII, procedural fairness to the Trustee and valuation in accordance with the Regulations, do not have to be complied with."
24. Whilst the Act does not define "procedural fairness", it is apparent that a trustee is required to be given notice of any intended orders relating to the superannuation fund and be
provided with the opportunity to be heard in respect of them. The section is a direction to the court not to make an order against
the trustee unless procedural fairness has been accorded. If procedural fairness were not accorded despite the requirement there
would be an error of law justifying an appeal. Arguably, there would also be jurisdictional error as a result of failure to fulfil
a precondition to making an order.
25. It has been said that failure to observe the provision will result in the court being deprived of jurisdiction. It is settled
by well established authority that a decision of a superior court, even if in excess of jurisdiction, is valid unless and until it
is set aside. As a superior court, the Family Court has authority to decide its jurisdiction and if it purports to act pursuant to
its jurisdiction, any orders that it makes will not be nullities and will continue to be binding until set aside. See Re Macks ex parte Saint (2000) 204 CLR 158; Craig v South Australia [1995] HCA 58; (1995) 184 CLR 163 at 179-180). That may be through an appeal or through an application seeking prerogative or constitutional writs in the High Court
on the basis that the court acted beyond its jurisdiction.
26. The Federal Magistrates Court is not a superior court. The Federal Magistrate's Court is by virtue of s.10 of the Federal Magistrates Act 1999 a court established by Chapter III of the Constitution. Federal Magistrates are appointed as Justices pursuant to Chapter III of the Constitution. The court is a court of law and equity. It is a court of record that exercises power given to it pursuant to the Family Law Act 1975, inter alia. In my opinion the relevant distinction is not between superior and lower courts but between courts and an administrative
tribunal. Thus, the fact that an administrative decision made without procedural fairness may be liable to be set aside and treated
as void ab initio does not apply to the situation of orders by courts. For this reason orders made by the Federal Magistrates Court without notice
to the trustee will be voidable, that is valid until set aside.
27. If a trustee, despite not having had an opportunity to make submissions, considers there is no reason why it would have sought
such an opportunity and it is prepared to accept the orders made so far as they are applicable to it there is nothing that stops
the trustee from giving effect to those orders. Those orders remain binding on all parties affected, including the trustee, until
set aside. In these circumstances, any action taken by the trustee pursuant to obligations arising from the order will be protected
and can be regarded as taken pursuant to a valid order.
28. There are a number of decisions where a court has allowed a hearing to proceed notwithstanding that no notice had been given to
the trustee. All are instances where courts have attempted to facilitate the hearing while the system has been in transition.
29. In Maddison [2003] FMCAfam 351 Federal Magistrate Baumann raised with counsel the equity of making a splitting order in respect of the husband's superannuation,
which was significantly higher than the wife's superannuation entitlement. He noted that although the parties had reached agreement
on valuation of the respective interests, no notice had been given to the trustees at the time of trial of any proposed order. During
the hearing the court was advised that the husband would give notice forthwith and by agreement the court would be informed by letter
of the attitude of the relevant trustee to the splitting order. The matter proceeded to finality and a splitting order formulated
"the operative time for this order is 14 days from the date the order is received by the Trustee".
30. In K & K [2003] FMCAfam180 at the start of the hearing the court asked the wife's counsel whether the trustee had been given notice that the
wife sought a splitting order in compliance with s.90MZD. When counsel confirmed that notice had been given the trial proceeded.
For completeness at the end of the hearing later the court asked for a copy of the notice to the trustee. Regrettably it became clear
that notice had not been provided to the trustee. All that had occurred was that the trustee had been requested to provide member
details sufficient to enable a valuation to be completed. To resolve the problem the parties counsel agreed on the following orders:
(i) "No later than 5:00pm tomorrow the solicitor for the applicant wife shall give notice in writing to the trustee of the wife's
superannuation fund of her intention to seek a splitting or flagging order.
(ii) That the solicitor for the wife submit a copy of the notice given to the trustee to the court, which notice will become an exhibit
in the proceedings.
(iii) That the trustee shall re-list this matter by arrangement with my associate no later than 5 June 2003 if the trustee wishes
to be heard in relation to the orders sought by the wife vis her superannuation.
(iv) The court otherwise reserves its decision".
31. On 28 May 2003, by agreement the court received a letter forwarded to the trustee by the wife's solicitor that day. When the trustee
had not sought to re-list the matter by the date specified in the orders, the court was satisfied that they had been afforded procedural
fairness and did not want to seek to be heard in opposition to the relief sought. Orders including a splitting order were then made.
32. In Anderson [2003] FamCA 635 - Justice Young determined that for various reasons the trial could not proceed. One of the issues in relation to any interim order
was the necessity of affording procedural fairness to the trustee. His Honour said that section 90MZD requires that the trustee be
given notice of the order that has been sought and the opportunity to be heard in relation to the making of the order. The court
had two letters from the wife addressed to the relevant trustee, which his Honour was satisfied was appropriate notice to the trustee
in relation to the orders sought generally as to superannuation. The issue, however, was the flagging orders that were sought by
oral application pursuant to section 90MU of the Family Law Act. His Honour was advised by the wife's solicitor that that morning he gave telephone notice of the proposed flagging order and the
trustee indicated that they did not wish to be heard on the matter. His Honour noted that had they wished to be heard he would have
stood the matter down to a convenient time to enable the superannuation fund to appear. For further discussion on this issue see
Fatt & Fatt [2004] FMCAFam 254.
TAXATION
33. Irrespective of the valuation methodology used, the value identified is usually gross value and does not take into account taxation
of the superannuation benefits. The issue will be whether tax should be taken into account as a matrimonial liability. Taxes are
payable when a superannuation benefit becomes payable. The amount payable depends on many factors, including maximum benefit limits,
pre 1 July 1983 service, age at receiving the benefit, marginal tax rate after retirement to identify but a few. A superannuation
split will result in two reasonable benefit limits being applicable and thus the threshold before tax is payable is in effect doubled.
Not for each party, but for the couple.
34. In Rosatti (1998) FLC 804 the Full Court of the Family Court of Australia considered when and how capital gains tax should be taken into account.
It seems to me that the principles outlined in Rosatti also apply in relation to whether or not the potential tax liability should be taken into account. In H and H [2003] FMCAfam 41; (2003) FLC 93-168 I discussed the factors relevant to superannuation and concluded that they appear to be:
a) when the preservation age will be reached;
b) when the member spouse is likely to retire;
c) whether the lump sum is taken as a lump sum or a pension or a mixture of the two;
d) the capacity to quantify tax payable. This will include consideration of the effect of two reasonable benefit limits.
35. In Rosatti the Full Court speaks in terms of the probability of the sale of an asset and hence incurring a CGT liability, however with superannuation
the issue is access to it by the member (and after a split in some cases a non-member spouse). Provided the member lives until retirement
the triggering event for the assessment of tax must occur. Does this mean that the court must take into account potential tax liability?
In my view it does not. Rosatti emphasises that each case turns on its own facts. Because the super splitting legislation mandates the valuation methodology for specific
funds, other than un-deducted contributions tax and surcharge tax identified in the last member statement, tax will not effect the
value of the asset. But tax may be a relevant liability as distinct from the valuation of the superannuation interest. Alternatively,
it may be a relevant section 75(2) factor, "the weight to be attributed to that factor varying according to the degree of the risk and the length of the period within which the
sale may occur".
36. In H & H it was at least fifteen years before the husband could reach the age at which he could take his superannuation. In the decision I
commented, "This many years away it is impossible to know what changes may be made to the superannuation tax system or his marginal tax rate after
retirement. Because of these uncertainties I have no evidence about what any tax liability might be. Thus I do not include any notional
tax liability".
37. There are at least three situations in which I consider it essential that practitioners obtain advice as to potential tax liability
for their client. Firstly, where the interest is in a self managed fund. I do not know whether disposing of assets held in a self-managed
fund attracts capital gains or other taxation. If payable, roll over relief may be available. It seems to me that an accountant could
advise the most effective strategy viz tax minimisation if dismantling or re-ordering interests in a self-managed fund. Where the
valuation of the interest is substantial and/or retirement imminent tax advice is essential. Without evidence of a potential tax
liability, the court's hands will probably be tied and the court restricted in its capacity to treat the potential tax liability
as a joint liability. The risk is that the party who retained their superannuation will ultimately receive less than was intended
because when the superannuation vests the party may receive a tax bill that could have been quantified but was not.
38. A useful article concerning taxation and family law can be found at http://www.mdlaw.com.au/family/articles/TaxFam.html
STEP THREE: TRIAL PREPARATION
36. The court will value the assets at the date of hearing. However, the value of assets at other times may also be relevant. For
superannuation, in particular, it may be relevant to have a valuation of the superannuation at the date of separation and also the
date of hearing, especially where a party has made significant contributions to superannuation after separation or the value of the
superannuation has increased considerably. Valuation evidence may enhance a party's capacity to persuade the court that they have
actually made a significant post separation contribution. There have been a number of cases where parties have made submissions solely
in reliance of, in effect a West and Green (1993) FLC 92-395 argument, which rarely finds favour.
37. In Millington and Tillbrook [2004] FMCAFam 44 Federal Magistrate Brewster when discussing superannuation held, "If the pro rata approach were to be adopted the share of the husband's superannuation that accumulated during the marriage would
be eleven nineteenths of its value of $228,137 which amounts to $132,079. On the same basis, the proportion of the wife's superannuation
of $31,095, which accumulated during the marriage, would be one-third, which equates to $10,365. If for arguments sake these were
divided equally the husband would be entitled to a split where the base figure for the wife's superannuation would be $5,182 and
the wife entitled to a split where the base figure would be $66,040. Offsetting the first against the second would result in the
split of the husband's superannuation where the base figure was $60,858. This would result in an order favourable to the husband
than that to which he has submitted. In my opinion, however, it is inappropriate simply to adopt such a simplistic pro rata approach.
The value of the husband's superannuation at the date of cohabitation and at the date of separation is unknown and there is no reason
to assume that eight nineteenths of its present value was in fact accumulated outside the period of the relationship."
38. I had cause to consider a similar issue concerning the value of a redundancy entitlement the date of separation in Iliev & Ilieva [2004] FMCAFam 2003. In that case the husband's solicitor attempted to calculate the husband's potential redundancy retirement as at the date of separation.
He used a formulaic approach apparently based on years of service multiplied by a specific sum and also a fixed figure that appears
to be a set minimum payment. He then divided it by the number of years of service compared to years of cohabitation. The wife's counsel
challenged his approach contending that the court required direct evidence from the company and/or an accountant. Agreeing with the
wife's counsel I held, "The difficulty with the formulaic apportionment of the entitlement is that it appears to adopt current rates rather than the rates
applicable at the date of separation. Apart from anything else, a formulaic approach has no real regard to the value of money at
any given time". Having accepted the wife's counsel's objection the court was left without evidence of the value of the husband's entitlement, if
any, at separation.
39. Working backwards, there will be cases where it is also important to have valuation evidence concerning the parties' interest
in a superannuation fund at the date of commencement of cohabitation. There are two factors that will primarily determine whether
or not valuation at the commencement of cohabitation is necessary. As a working rule of thumb if it is considerable obtain a valuation.
The second factor is the duration of cohabitation. In most cases initial contributions will have greater significance if cohabitation
has been short.
40. A developing area for controversy is the structure of the actual orders. It is increasingly commonplace for a party to submit
that they should take the lion's share of their entitlement from the available assets whilst their partner should take their entitlement
in superannuation. Thus, one party will have assets that they may have to wait years before they can be utilised. It is in the fourth
stage of the usual process by which courts determine property applications when this issue arises. Because the court must consider
the actual orders, not just the percentage distribution under section 79(2) justice and equity requires that the court stands back and looks carefully at the section 79(4) and section 75(2) process. There are two relevant section 79(2) issues. The first is whether section 79(2) is a fourth substantive step that enables the court to order a further adjustment beyond that achieved by section 79(4) and section 75(2). Secondly, what factors the court may take into account in determining the actual orders.
41. For a scintillating analysis of the former issue read Federal Magistrate Walters decision O'Sullivan and O'Sullivan [2004] FMCAfam 63. The starting point for this discussion is the Full Court's decision in Phillips [2002] FamCA 350; (2002) FLC 93-104 where it said, "In determining an application pursuant to section 79 findings will usually be made as to the entitlements of the parties expressed as a percentage of the nett assets of the parties having
regard to the matters contribution and the other factors. However, when considering whether or not the overall result is just and
equitable a further adjustment may be warranted depending on the circumstances of the case." At page 88, 986.
42. I am inclined to agree with Federal Magistrates Walter's opinion, "In my view, Phillips is not and cannot reasonably be interpreted as authority for the proposition that a court exercising jurisdiction
under the Family Law Act 1975 in relation to property settlement, should "Stand back" and make substantive alterations to the result that has been reached after
the application of what has been described as the first three steps in the property settlement exercise. The Full Court in Phillips
recognised that the order which it considered to be just and equitable in all the circumstances, after allowing the appeal and exercising
its own discretion) was an order that it self fell within the range of reasonable and appropriate orders having regard to the specific
findings made by the trial judge. The Full Court did not suggest that any form of additional "loading" could or should be added to
(in that case) the wife's overall entitlement. Clearly, the "further adjustment' to which the Full Court referred in the passage
quoted above could only comprise an adjustment to the form, structure or balance (for want of a better description) of the relevant
orders. Alternatively, the Full Court could only have intended to mean that the 'further adjustment' associated with the fourth step
would be an adjustment from one (slightly less) just and equitable result based on the first three steps of the property settlement
exercised to another (slightly more) just and equitable result based on those same three steps.
43. Following are a selection of recent decisions, which identify factors that courts have considered when deciding to make a splitting
order. In H and H (supra) I considered the following in determining a just and equitable outcome: "Because the court must consider the actual orders not just the percentage distribution under s.79(2), justice and equity in cases where the court may order a splitting or flagging order requires careful consideration of the range
of orders available. Counsel for the wife submitted five schedules reflecting a 65 %–35% distribution of the nett assets. The
purpose of the schedules was to show the comparative effect of the actual orders the court may make. Thus the schedules while all
effecting the same percentage split overall, proposed different percentages applied to immediately available assets and splittable
superannuation. Central to the wife's submission is her need to rehouse and buy a home. She concedes that if one party were to receive
all of the immediately available assets while the other was required to wait for the entitlement to be paid from superannuation,
then the party receiving the lions share of the currently available assets would receive a lesser percentage when the court undertook
the s.79(2) exercise. I agree. Neither counsel addressed how such a discount factor should be calculated.
Counsel for the husband submitted in essence that both parties should have to wait for the superannuation entitlement to be paid out.
Superannuation has long been regarded as a joint venture to which parties contribute and plan for their retirement. The intent of
the super splitting legislation is to ensure that the artificial divide whereby one party, commonly the husband, has the sole benefit
of superannuation saved for during cohabitation, no longer operates. Because of the super splitting legislation the non member party,
usually the wife, can share in the benefits of retirement planning through superannuation. Thus the spectre that in her retirement
she is more likely to live in comparatively parlous circumstances can be redressed. Does this mean that the court must order the
distribution of the assets in accordance with the findings otherwise made pursuant to s.79(4) and s.75(2) to both the splittable superannuation and also the available assets? In my opinion it does not. The court is enjoined to consider
the particular circumstances of each case and hence deliver individual justice. Thus in some cases it will be appropriate to order
that a party take their superannuation entitlement by an adjustment to other assets. This is the approach adopted by Moore J in Levick. Her Honour balanced the factors set out below before deciding that the wife should have a greater percentage of the available assets
and a lesser percentage of the splittable superannuation in order to give effect to the appropriate overall percentage distribution.
The relevant factors were :
- The purchase price of appropriate accommodation and rehousing costs for both parties.
- The need for a financial buffer for ordinary exigencies of independent living.
- The current level of the parties superannuation.
- The probability that the wife would be able to acquire appropriate superannuation benefits from her own future income.
- The husbands substantial earing capacity and ability to borrow significant sums at favourable rates (from his employer).
Applying those factors in Levick the wife's entitlement to the available assets increased so that she had 66.5% of the non superannuation
assets and 40% of the splittable superannuation. Because the husband had to wait 10 years and pay tax on his interest (as did the
wife but on a lesser sum) the wife's superannuation entitlement reduced from 40% to 36.5% equivalent to 3.5% of the other available
assets.
From the wife's entitlement she will not only need to pay the purchase price of a home, but also stamp duty, legal costs and associated
rehousing costs. There was no evidence about the range of house prices in the area she wished to buy into. However I accept that
she needs every available cent to be able to purchase a house that she can afford to keep once loan repayments are taken into account.
There is no suggestion that even with 100% of the available non-superannuation assets that she will have enough to buy a home without
borrowing additional money. If that result were ordered she will have considerably less available in superannuation upon her retirement.
Because she has the care of young children and is unlikely to achieve well paid employment for many years there is little likelihood
that she will be able to acquire adequate superannuation from her own earnings. Unless provision for her future retirement is provided
in these proceedings the prospect is that she will have manifestly inadequate superannuation upon retirement.
In determining the appropriate s.79(2) adjustment I must consider similar issues as they pertain to the husband. He also needs adequate accommodation for himself and the
children when they are with him on contact. His greater earning capacity means that he can service higher mortgage repayments than
the wife can. Also that he can make greater contributions to superannuation and is probably better able to provide adequate superannuation
benefits than she will. Unfortunately the evidence concerning his borrowing capacity was vague, revealing little more than he had
raised the issue with his father. Although the wife's counsel submitted that the house had to be sold that outcome does not accord
with the husband's intent. He has considerable business acumen and understands money. I accept that his stated aim of retaining the
home is achievable provided the court orders an adjustment within the range of reasonable exercise of its discretion or the spectrum
of the applications. Were it otherwise I would have expected more precise evidence as to his borrowing capacity."
44. In Lambrinidis & Koulakis [2004] FMCAFam 3 Federal Magistrate Brown when considering similar issues held,
"Neither party, at this stage, has a pressing need to consider retirement planning. Both parties are likely to have time and ample
opportunities to acquire appropriate superannuation benefits from their future employment. If the wife does become a primary school
teacher, she is likely to have many years of employment before her. The husband is likely to make a successful transition to a bureaucratic
position in industry or commerce.
In my view, the evidence in this case, indicates that the husband has a significant equity in the Eden Street property. He also has
secure employment on a reasonable salary. Accordingly, he is well placed to borrow funds in future. In contrast, the wife is likely
to have significant difficulties in borrowing funds. She has provided no evidence as to whether or not she would be able to service
a modest mortgage on her current income, which is provided by social security. Common sense would indicate that she is likely to
have difficulty servicing even the most modest of mortgages. Accordingly she may not be able to provide secure accommodation for
herself and the children for some years to come. The pressing need of the wife at this stage is for sufficient funds so that she
"can provide a better standard of living for myself and the girls". Whether this includes the purchase of a suitable property for
herself and the children to live in is unclear to me.
The husband is currently living in rented accommodation. This is a situation of his own choosing. It would be open to him to live
in the elevated house at Eden Street, if he wished to and still have the benefit of renting out the six other units. The fact that
the husband was able to borrow money to purchase another investment unit indicates that his circumstances are such he has a sufficient
financial buffer to protect him from unforeseen financial mishaps. The wife is not in such a happy position.
I accept that, if at all possible, the husband wishes to retain his half interest in the Eden Street property. This will mean that
he will have to borrow sufficient funds in order to pay the wife her entitlement pursuant to these proceedings, using the Eden Street
property as security. If he is unable to raise a sufficient sum in this way, it will be necessary for the property to be sold. Given
that his interest in the property is held as a tenancy in common with his father, this may pose unforseen difficulties. In the event
that Mr K does not wish to sell, the only potential purchaser of the husband's interest is likely to be either Mr K himself or another
member of the husband's immediate family.
It is the husband's evidence that he is likely to find it difficult to borrow a substantial sum against his interest in the Eden Street
property. His evidence was that in May of 2002, his bank was unwilling to lend him $320,000.00, in order to re-finance his existing
mortgage with the Commonwealth Bank and to purchase his father's share of the property. Given Mr S's view as to the current value
of the property, based on its income earning potential, and the extent of the husband's equity in the property, when coupled with
his current level of salary, I have some scepticism about the husband's trepidation at making an application for a loan. However,
I do not believe that it is reasonable for me to fix the amount of money required to be paid immediately to the wife at such a level
that it will require the immediate sale of the Eden Street property. This is so because of the unusual circumstances surrounding
the property and the manner in which the husband's interest is held with his father.
This leads me to the view that it is just and equitable for the wife to receive a significant proportion of the assets due to her
by way of these proceedings, in the form of a split of the husband's superannuation. In my view, given that the parties are a similar
period of time away from retirement, it is only just and equitable that there should be a significant split of superannuation to
the wife. Although the husband is markedly better off financially than the wife, he still has need for some capital at this stage.
Given the time and effort he has expended into the Eden Street property; his sentimental attachment to it; and the fact that his
interest in it is held in a tenancy in common with his father; I can readily understand why he would wish to retain the property,
if at all possible.
45. In Weiss & Weiss [2003] FMCAFam 228 Federal Magistrate Brewster held,
"The wife's position, as I have indicated, is that there should be no split. She seeks a substantially greater share of the other
property of the parties to compensate her for this loss of superannuation.
The husband's position however, as I have indicated, is that he does not wish to, in effect, trade existing property for the future
benefits of superannuation. He seeks a substantial share of existing property now to enable him to re-establish himself.
It is apparent from a reading of the Explanatory Memorandum to the legislation that changed the law in relation to superannuation
that there are two reasons for that change. These are:
a) To protect the spouse where the other spouse has significant superannuation and there is no other property or no other sufficient
property from which an order could be made which would be just and equitable in the circumstances. Under the present regime the non
member can be given a part of the member's superannuation.
b) To achieve a just and equitable result where one party has substantial superannuation but there is also the substantial property.
The amendments to the law allow greater flexibility. Previously, a superannuated party's interest in his or her superannuation
would mean that current property would often have to be traded away in exchange for an asset that may not be able to be realised
for many years. This would leave one party with realisable assets but no retirement income or less retirement income, and the other
party with little or no realisable assets but, perhaps, a significant retirement income. Under the new regime this can be avoided.
In my view, it would not be just and equitable to deprive the husband of a substantial share of property to which he has made contributions
over a long period of time on the basis that he will one day be able to enjoy substantial superannuation benefits.
The husband joined his superannuation scheme in April 1980. Until separation his benefits were almost all accrued during the relationship.
It is now almost two years since the parties separated and a significant amount of the husband's superannuation has been accumulated
since this date. It would be possible to make a contribution based split on a basis of a pro rata adjustment. The complicating factor
in this respect is the wife's superannuation, which must also be taken into account. The status of the wife's superannuation
is not easily determined. Her employment has been somewhat irregular and it would be inappropriate to apply a pro rata approach to
her entitlements.
In the circumstances, I propose to make an equal split of superannuation. As I have indicated I will have regard to the fact that
such an even split does not take into account s.75(2) factors when adjusting the balance of the parties' property.
I do not propose to split the wife's accumulation interest superannuation. I propose to reduce the wife's share of his accumulation
interest to take account of this. If the husband were to be given a 50% split of the wife's superannuation it would give him
$6,844. I propose to deduct this amount from his accumulated interest before making a splitting order with respect to his superannuation
entitlements. This means that the amount to be split is $106,364 and the wife's 50% share of this is $53,182."
46. If a party is seeking to retain the matrimonial home and in order to do so requires a greater share of the available compared
to superannuation assets in an amount different to the percentage distribution being applied to all assets, the party should adduce
evidence as to the limits of their borrowing capacity. Perhaps also the cost of comparable accommodation in the region. Similar evidence
is relevant for the person seeking to minimise the percentage distribution they take from superannuation if they seek to rehouse
in owned rather than rental accommodation. The court should be informed about the cost of different styles of accommodation in the
region. This style of evidence resulted in the wife in Levick taking a greater share of the available assets so that she could adequately house herself and the children. Obtaining this style
of evidence need not be expensive. A party can set about making inquiries of real estate agents and have available publications,
for example newspapers, evidencing style and asking price of homes. Listing price does not evidence selling price, however, this
style of evidence may be a useful guide for courts when considering the structure of the actual orders. It would be insufficient
to provide evidence of price of accommodation. This fourth step will probably grow in significance because the scope for structuring
the orders is now much broader. However as in all things if the parties are looking for a creative outcome from the court they must
ensure that the court is armed with the evidence to deliver the outcome sought.
STEP FOUR: SERVE THE ORDERS
47. The court does not send the orders to the trustee. This is a matter for the parties. Serving the orders upon the trustee is fundamental
to their enforceabilty. The trustee will only be able to comply with the orders if the trustee has notice of the orders. Service
of an application for an order is different to service of an order. It is surprising how frequently parties overlook this step when
obtaining injunctions, almost always with catastrophic consequences.
Federal Magistrate Judy Ryan
Federal Magistrate's Chambers Parramatta
21 June 2004
Footnotes
1. A paper given to NSW Young Lawyers on 22 June 2004
2 Bourke, S. (2002) Family Law: The New Super Splitting Laws extracted from http://www.lawsociety.com.au/page.asp?partid=6491
3 Rosatti at par 85, 043
4 [2003] FamCA 40 (unreported) |
