Superannuation may not be top of mind for couples going through a divorce but the Australian Taxation Office has issued a reminder that special rules apply for payment splits arising from divorce or relationship breakdown.
From July 1 there is a $1.6 million cap on the amount that can be held in a tax-free superannuation pension.
Following a divorce or other relationship breakdown, superannuation interests may be split as part of the division of the property, arising from an agreement of the parties or a court order.
A payment split might involve the fund member spouse converting part of their income stream to a lump sum and paying it to the non-member spouse, or retaining ownership of their super interest and having a portion of each income payment directed to the other party.
If the super income stream is partially commuted, this will create a debit in the member’s transfer balance account, with the transfer balance account reduced by the amount paid to the other party.
The other party may choose to use the lump sum to start a new super income stream, in which case it will give rise to a credit in their transfer balance account and will count towards the cap.
If a portion of the member spouse’s income stream payments is directed to the other party, both parties will have the entire value of the super income stream credited to their transfer balancer account.
The member spouse’s transfer balance account will then be debited by the proportion of the income stream the other party is entitled to, and the non-member’s transfer balance cap will be debited by the member spouse’s portion.
For these debits to be made, one of the parties must notify the ATO in writing of their circumstances.
If, at a later stage, the member spouse’s super income stream is commuted, both parties will receive a super lump sum and both will receive a debit in their transfer balance accounts for the value of the lump sums they receive.
Non-member spouses who are receiving a portion of a super income stream as a result of a relationship breakdown should check with their super fund to see whether the payments, and the adjustment in the transfer balance cap, will take their retirement phase interests above $1.6 million.