Recent amendments to the Family Law Act 1975 (Cth) have changed the way the courts deal with superannuation in property settlements. The Family Law Legislation Amendment (Superannuation) Act 2001 (the Act), which took effect on 28 December 2002, enables the courts to make orders directly affecting superannuation funds, a move long awaited to provide another method of distribution of this asset of the marriage.

Prior to recent amendments, courts were restricted to treating superannuation as a “future financial resource” of the marriage - other assets had to be adjusted as it was not capable of being treated as if it were property to be divided in any settlement. The one exception to this occurred when the superannuation policy had vested. As the husband remained the predominant breadwinner of the family and the most likely party to hold significant superannuation interests in his name, the result was typically that women received a greater share of the family home and other assets of the marriage while the husband retained his right to superannuation by settling for a smaller share of the more immediate property. Sometimes, neither situation proved fair and equitable.

The new amendments to the Act enable the courts to treat superannuation as an asset of the marriage to be dealt with in the same way as other property. The Act applies to most family law applications for property settlement but does not apply where there is an existing order or interim order under sections 79 and 87 of the Family Law Act. Similarly, the Act does not apply to some superannuation interests; for example, where the superannuation is a reversionary interest (conditional upon the death of another living person), or where the superannuation interest is “unsplittable” (described in the regulation as having a withdrawal value of less than $5000), or where there is an existing financial agreement in relation to the superannuation interest. These exclusions account for only a small number of superannuation interests, with most people having accumulative superannuation funds where entitlements are directly related to contributions and earnings on those contributions. These superannuation interests are covered under the Act as if they are assets of a marriage.

Basically, the Act gives the Family Court the ability to make orders directly affecting superannuation interests as well as enabling parties to agree to the division of superannuation in property settlements. There are three ways in which the Court can deal with superannuation: splitting order or agreement, flagging order or agreement, and an order offsetting the superannuation against other assets.

Splitting order
Superannuation interests may be divided between the parties to a marriage in such proportion as agreed to or determined by the Court. This allows treatment of superannuation interests in the same way as other property of the marriage. Once determined, the split will give the non-member spouse superannuation entitlements resulting in a corresponding reduction in benefits payable to the member spouse. The non-member spouse may be entitled to create a new superannuation interest determined by the provisions of the Act in conjunction with other superannuation legislation. The obtaining of financial advice in this area is essential.

Flagging order
A “flag” operates similarly to an injunction in preserving the superannuation until it can be dealt with by the Court or by the parties through agreement. The flag also requires the trustee to notify the Court or the parties when the interest will become payable and its use is valuable in situations where the value of a superannuation interest is unknown but likely to become payable in the near future, e.g. imminent retirement of spouse. Once the value is known, a “flag lifting” order or agreement can be made enabling the superannuation to be split.

Offsetting order
Offsetting superannuation interests against other assets of the marriage is substantially what the courts and parties to a property settlement have been involved in to date. The main difference as a result of the Act is that the superannuation interest is now considered in the general pool of assets of a marriage and a level of uncertainty is removed.

There are two important effects of the reforms under the Act. First, in dealing with superannuation interests, the Court is given the ability to bind third party trustees. Once served, the trustee must comply with the court orders made in relation to the superannuation.

Secondly, before dealing with the superannuation interest, the Court needs to be satisfied as to its value. The legislation prescribes complex valuation methods to be used for various superannuation interests. It is important that financial advice from an accountant or actuary alongside legal advice is obtained to ensure that the valuation process is carried out correctly.

The Act provides welcome reforms in the whole area of superannuation in family law matters. The ability of the courts to deal with superannuation interests as property to be divided between the parties may prove to be a fairer system for everyone, providing the opportunity for property orders to be made with a greater level of certainty and finality.