Government's Proposed Superannuation Policy May Have a Devastating Effect on Divorcees

If you have lost your superannuation in a divorce settlement, you face losing the ability to replace it under the proposed super changes.

As part of the changes:

1. Non concessional contributions (made after tax) will be limited to $500,000 per person over a life time;
2. Concessional contributions (made before tax) will be reduced to $25,000; and
3. Over 50’s will lose the ability to contribute $35,000 a year.

With the average age of divorce being 44 according to the Australia Bureau of Statistics, this is devastating.

Imagine spouse A and spouse B enter into property negotiations to end their financial relationship. Spouse A has $650,000 in super while spouse B has $200,000. They both earn about $85,000 p.a and have a family home worth about $900,000. By way of final settlement, Spouse A keeps the family home and spouse B keeps all the super. Let’s assume this arrangement is considered just and equitable at the time.

Spouse A is left to rebuild their super after the divorce settlement.

If the proposed changes take place, then Spouse A can only pay $25,000 a year in concessional contributions and nothing else as they have used their lifetime non concessional limit.

Spouse A has the ability to put $2,450 as non concessional contributions a month but will have to invest it outside of their super which may be taxed at a higher rate and income may be taxable in retirement compared to tax free super pensions.

As a result of the proposed super changes, the settlement reached between Spouse A and B may not longer be just and equitable.

The Family Law Act gives the Court the power to vary or set aside property orders if it is satisfied that one of the following circumstances exist:

1. There has been a miscarriage of justice; or
2. Circumstances have arisen since the final orders making it impracticable for the order or part of the order to be carried out; or
3. A person has defaulted in carrying out an obligation imposed on the person by the order and, in the circumstances that have arisen as a result of that default, it is just and equitable to vary the order or to set the order aside and make another order in substitution for the order; or
4. In the circumstances that have arisen since the making of the order, being circumstances of an exceptional nature relating to the care, welfare and development of a child of the marriage, the child or, where the applicant has caring responsibility for the child (as defined in subsection (1AA)), the applicant, will suffer hardship if the court does not vary the order or set the order aside and make another order in substitution for the order; or
5. A proceeds of crime order has been made covering property of the parties to the marriage or either of them, or a proceeds of crime order has been made against a party to the marriage.

It appears that there may not be any legal relief for Spouse A to address the financial hardship they may face at retirement. Spouse A will not be alone; these changes apply to contributions made back to July 2007 therefore parties who have divorced in the last 9 years may also be affected.

Although superannuation is generally considered divisible property for the purposes of property settlements, it will be interesting to see how these changes will affect applications by a party for super splitting orders. Currently, it may be just and equitable for one party to retain part of the other’s superannuation as a final settlement as the other party may have the ability to rebuild it, however under the proposed changes the same scenario might not be just and equitable given the reasons outlined above.

This information is general in nature and is not intended to be relied upon as legal advice. We urge that you obtain legal advice before acting upon anything you read in this article.

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