By Natalie Landberg, Lawyer
Whilst we have heard that the current situation is unprecedented and it is unknown how long we are expected to endure the current climate, it is clear that the spread of coronavirus (COVID-19) has caused a significant reduction in the value of superannuation, shares and businesses. Unfortunately this will impact current and new cases in relation to financial settlements in the Family Law space, causing further delays to an already burdened court system.
The Impact of COVID-19 on Superannuation
Superannuation splitting laws in the family law realm are in place to allow the parties to value their superannuation and split superannuation payments. Superannuation will be held in either an Accumulation Fund or a Defined Benefit Fund. When a superannuation split is considered, determining the value of the superannuation interest is an essential step and depending on the type of fund, the approach to value such funds are different.
Whilst the value of a member’s interest in an Accumulation Fund is the balance on a member’s statement, the value of a Defined Benefit interest is generally calculated by reference to the member’s salary, years of service and includes a specific formula. The drop of the share market in response to COVID-19 has led those who have an Accumulation Fund with a portion of their superannuation in shares, to see a significant decrease in the value of their superannuation. In comparison, those with a Defined Benefit Fund may be more protected during this time due to the use of a specific formula.
Furthermore, whilst many super splitting orders are expressed in dollar terms, the result of the volatility of the share market means that it may preferable for a split to be expressed in percentage terms, in order to spread the risk more evenly amongst the parties.
Early Access to Superannuation
Clients should also think carefully about whether they would like to access their superannuation early under the temporary compassionate ground, in accordance with the new Economic Support Packages that the Federal Government has released. If client’s are eligible individuals affected by COVID-19, from mid April 2020, they are able to apply for access of up to $10,000 of their superannuation before 1 July 2020. A further $10,000 will be available from 1 July 2020 until 24 September 2020. Tax is not payable on these amounts and will not affect Centrelink or Veteran’s Affairs Payments.
Whether the courts will consider the early release of superannuation as an ‘add back’ into the parties’ property pool is uncertain. Arguably, it is unlikely if the money has been properly applied to meet living expenses and other reasonable costs. It is important that clients still obtain independent financial advice during this time, to ensure they fully understand financial consequences of accessing superannuation early.
Whilst Australian economists are predicting a drop of 20 per cent in the property market, it is very much unknown what the overall impact of COVID-19 will be. Thus property settlements that are yet to be implemented by parties may now seem unworkable or unfair.
COVID-19 has significantly affected businesses across the globe and therefore whether parties’ want to obtain updated business valuations needs to be considered. Whilst prior to COVID-19 a further maintainable earnings approach was commonly utilised by experts, there is now an argument that there will be greater use of a discounted cash flow approach. Such valuations will become more complex and more costly for parties, and disagreement between experts may arise due to the uncertainty in this space.
Clients should therefore consider how COVID-19 may have impacted their business. If a client has already received a business valuation, it may be beneficial seeking the advice of an expert to briefly review the valuation to consider whether a further valuation would be worthwhile.
It may be argued that as the impact on the economy is unknown, it may be both wise and prudent for parties to hold off on accepting a financial settlement during this time. This will inevitably delay the courts in finalising ongoing proceedings; however this may avoid parties’ accepting a potential disadvantageous settlement or later attempting to argue to have the agreement or orders set aside. It will however likely take the global environment some time to recover and therefore whether the parties delay obtaining a new or updated valuation, or finalising a property settlement, may be unfeasible for some.
Insight from the Global Financial Crisis
Whilst it is uncertain how the courts will approach the impact COVID-19 is having on superannuation and valuations in the context of family law matters, insight may be gathered from decisions made during the Global Financial Crisis (GFC). For instance, some cases during the GFC illustrate that the courts appreciated the uncertain nature of a global crisis and that they are willing to accommodate accordingly.
For example, in Cabbell v Cabbell , the Court expressed concern regarding the decreasing value of assets of the parties’ as a result of the GFC. The Court did not make final orders in this matter however the Court provided the parties an opportunity to re-open their case in the future to make further submissions about the value of assets and liabilities and superannuation if necessary. Furthermore, in Sadler v Sadler the Court re-listed the matter for four months’ time to hear further submissions in relation to the parties’ superannuation as the Husband’s superannuation fund had lost substantial value as consequence of the GFC. These cases illustrate that in the right case, the courts may adjourn proceedings, pursuant to s 79(5) of the Family Law Act 1975.
Whilst these are uncertain and unprecedented times, it is important to seek legal, expert and independent financial advice in relation to superannuation splitting orders, potential valuations regarding businesses and properties and to discuss the overall impact of COVID-19 on a family law matter, whether the matter is ongoing or whether a new case is arising.
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