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ARTICLE: It'll end in arrears
Sydney Morning Herald
2 October 2002, p6
Section: Money
It'll end in arrears
By Annette Sampson
Trying to untangle the finances after a break-up is a good reason to stay together, reports Annette Sampson.
Breaking up is certainly hard to do but it isn't made any easier by the part money plays in the equation. Separating a couple's finances can be every bit as difficult as separating other aspects of their lives especially as two individuals never seem to be able to live as cheaply apart as they can together.
From December 28 married couples will be able to split their super as part of the divorce equation. But whether this will be a boon or just another financial complication is yet to be seen.
So how does it all work?
PROPERTY SETTLEMENTS
Garry Watts, the chairman of the family law section of the Law Council of Australia and a senior partner with Watts McCray, says the division of property is subject to a four-part process when a marriage breaks down. First, the court identifies and values the assets, liabilities, and financial resources of the couple.
Then it looks at the contributions of each partner to acquiring, conserving, and improving the assets in the pool. Those contributions can be both financial and non-financial, and direct and indirect they are not limited to who earned the money that was invested.
"Particularly in longer marriages, the role of home-maker and parent is given equal weight in terms of contributions," Watts says.
The court then asks whether, looking forward, there is a disparity in the financial positions of the two parties that warrants a further adjustment.
"A typical example is an adjustment made where the woman has been out of the workforce raising children and her spouse has a far better ability to regenerate capital into the future," he says.
The final overriding step is to ask whether the result is just and equitable.
Under the current laws, super is not part of the pot that can be divvied up under stage one of the process, says family law specialist Michael Taussig, of Taussig Cherrie and Associates.
"It's called a resource and is considered in the third stage," he says.
But from December 28 couples will be able to agree (or the court can rule) to transfer part or all of one partner's super to the other partner. So it becomes part of the total pool considered in stage one.
The legislation will apply only to married couples, though, as de facto and same-sex couples are covered by state laws. Taussig says there were moves by the states to cede their powers to the Commonwealth but they stalled because the Commonwealth did not want to take on same-sex couples. Children of de facto couples come under the jurisdiction of the Family Court but financial settlements do not.
In NSW, says Watts, if a de facto or same-sex relationship breaks down, the courts basically follow steps one, two and four that apply to marriage breakdowns. But they don't look forward at ongoing financial disparities.
Watts says the NSW relationship laws also cover people living under the same roof who are in a dependent relationship.
SUPER SPLITTING
Watts says the intention of the new legislation is to give couples more flexibility in how they split their assets.
Take a couple who started with nothing and now have a house worth $400,000 and $200,000 worth of super in the primary earner's account.
All other things being equal, under the current laws you might expect the non-superannuated partner to get $300,000 from the house with the main earner getting $100,000 from the house plus the super.
Under the new laws, he says, the couple may choose to each get half of the house and half of the super.
"Couples will have extra flexibility to be able to split [the super] where they want this to occur or where there are not enough other assets available," says Taussig. "But it won't necessarily be good news for everyone."
Taussig gives the example of Mrs Average, a homemaker who lives in the suburbs with a couple of young children. If her husband has $60,000 in super and they jointly have $100,000 equity in their home, you would expect her to get the equity in the house as her divorce settlement. This is about 60 per cent of the total asset pool.
"But, under the super splitting laws, he could say that's not fair," says Taussig. "He could argue he should get 40 per cent of the value of the house and she should get 60 per cent of his super."
The problem for the wife is that the house would then have to be sold so that the husband could cash in his equity.
"I don't think that's the way the courts will go but there will certainly be applications along those lines," says Taussig.
Ross Johnston, a director of Fintech Solutions, says one of the benefits of super splitting is that each partner is entitled to an individual reasonable benefit limit (which determines how much you can take out of super on a concessionally taxed basis) and lump-sum tax-free threshold.
But Peter Hogan, the national technical services manager with Colonial First State Investments, says people lucky enough to have too much super (in that they exceed their own reasonable benefit limit) can't use a super split as an easy way to get rid of their impending tax problem. "There are measures in the legislation to ensure splitting is only done in the event of genuine divorces," he says.
In other respects, says Hogan, the tax treatment of the transferred super remains the same.
"All the components of the super benefit come across on a proportionate basis," he says. "The only thing that doesn't transfer across is the original member's service period. Under the legislation, the recipient's service period starts on the day the money was transferred into their account."
This means fund members with significant amounts of super relating to pre-1983 service may be better keeping their super than transferring it to their spouse as this money receives concessional tax treatment. Taussig says he expects super splitting will come into its own with higher net worth couples.
"Often they have a self-managed super fund and other assets," he says. "Usually the husband will say he can live with giving his spouse half of the assets and super but they should both have the gains and pains."
However, if you have a DIY super fund, Hogan says, one catch is that the rollover relief from capital gains tax only applies to money transferred from one spouse's account to the other's.
If one spouse wants to take money out of the fund which is not uncommon in the circumstances CGT will be triggered on that amount.
DIVIDING THE SPOILS
Financial planner Laura Menschik, of Millennium Financial Services, says getting financial advice is often the last thing people think of when they are going through the emotional upheaval of a relationship breakdown. But a planner can help to ensure the settlement is structured both tax-effectively and to suit future financial needs.
"If one partner has always earned the income, the other partner will probably need to earn an income from their settlement," she says.
It may be better for that partner to receive income-generating assets while the higher earner keeps the assets that have a low level of income but the potential for growth (and the risks that go with that potential).
The transfer of assets under court-sanctioned property settlements won't trigger capital gains tax, but CGT may have to be paid when you sell the asset.
"It doesn't eliminate the CGT liability; it just stops it being triggered at that point," says Johnston.
"It's good in that any pre-CGT assets retain that status, but you have to consider the potential tax burden attached to each of the assets. In some cases it may be substantially higher than in others."
PRENUPTIAL AGREEMENTS
In December 2000 the Federal Government passed laws to allow married couples to make binding prenuptial agreements. Taussig says after December 28 couples will also be able to make binding agreements on superannuation. But these are not agreements to be entered into lightly.
Both parties have to be given independent legal advice on the consequences of signing prenuptial agreements but, once signed, they are difficult to set aside. Watts says there are five grounds for these agreements to be set aside:
- The agreement was obtained by fraud.
- The agreement could be made void under contract law.
- There was a change in circumstances of a material nature relating to a child and hardship would be caused if the agreement was not set aside.
- The agreement can't be practicably implemented.
- The agreement is unconscionable.
Interestingly, he says, there is no "just and equitable" test for prenuptial agreements.
"If your financial circumstances change, the agreement can still stand," says Taussig. "Usually it is the economically stronger party who insists on it and the other party gets taken there kicking and screaming.
There are arguments against having them but, particularly in the case of second-time-arounders who want to protect assets for their children, they would be crazy if they didn't have one."
Watts says one of the problems with prenuptial agreements is that the capital gains tax rollover relief generally granted when assets are transferred as part of a divorce settlement does not apply in the case of financial agreements.
Taussig says in the case of de facto and same-sex couples, agreements have always been recognised under state laws but, while they are taken into account by the courts in deciding property settlements, they are not sacrosanct. "Agreements are sacrosanct under Family Law unless they are set aside."
ASSET PROTECTION
Taussig says it's very hard to hide assets under Family Law and those who suspect their partner has salted some money away should hire a forensic accountant to track it down. One of the common measures used to protect assets is a family trust but he says if this is controlled by one of the parties it becomes part of the asset pool.
"The law in relation to companies and trusts is that if it is a puppet of one of the parties it is treated as their asset," says Watts. "So even if the husband, for example, isn't a director or shareholder in the trustee company, if he has the power to appoint the trustee and control the operation of the trust, it may be regarded as his asset."
In cases where the assets in the trust are not accessible, they can still be taken into account as financial resources if they can be shown to benefit the concerned party.
Johnston says one strategy commonly used to protect trust assets is to ensure you are not the sole trustee. "For example, you may have a trusted friend or relative as co-trustee who has to co-sign everything." He says this is not bulletproof (and you can't retain the power to sack your co-trustee) but the Family Court has had difficulty making orders that bind third parties.
BLENDED FAMILIES
One of the reasons for the ongoing interest in structures like trusts is the growing number of blended families where people enter into a new relationship and want to safeguard their existing assets for the children of past relationships.
Hogan says one popular strategy for second-time-arounders is to give a life interest in assets to their current spouse with ownership reverting to the children on the spouse's death.
A person might, for example, structure affairs so that the spouse receives the income from an investment portfolio for life, but upon the recipient's death, the capital reverts to the kids.
Johnston says setting up a testamentary trust in a will is also being used to ensure assets remain with the family not the in-laws.
Cutting the financial ties
A checklist for the newly separated:
- Who is the nominated beneficiary of your super fund? If it's your former spouse, you might want to change it.
- Have you changed your will and power of attorney?
- Who owns your life insurance policy? In many cases life insurance payouts go to your estate and are dealt with under your will. You may have nominated your ex as the owner of the policy, though, so you might want to change it unless you want him or her to get a windfall if you fall under a bus.
- Do you need income-protection or disability insurance? Financial planner Laura Menschik, of Millennium Financial Services, says often women, in particular, ignore this type of insurance because they believe their spouse will look after them if needed. But this won't be the case now you're on your own.
- What's the status of your banking arrangements? Joint accounts will need to be closed and individual accounts opened. Does your ex have a supplementary credit card off your account?
- If you have guaranteed any loans, what is the status of those loans? Menschik says it's not always easy to 'undo" a guarantee but you need to unwind your future finances from those of your ex.
- How much will it cost to live without your ex? Menschik says often the hardest thing for divorcees (and widows) is accepting that their lifestyle will have to change. She suggest you do a "singles budget" and work out whether you can afford to maintain the same standard of living or whether compromises will have to be made. "Most people find their ongoing expenses won't be reduced by much, even though their income will be nothing like what they were used to," she says.
- If you're receiving any social security benefits, inform Centrelink of your changed circumstances. Ross Johnston, a director of Fintech Solutions, says where one partner becomes unemployed and has custody of the children they may be eligible for a parenting payment from Centrelink. A guardian allowance may also be payable.
- Check on arrangements such as health insurance and other types of cover. Do you still have them?