Superannuation and coercion

19.25 A victim of family violence may be coerced into taking action that relinquishes some control over, or access to, his or her superannuation. This could potentially leave the victim facing a financially difficult retirement, or deprive them of assets to which they have contributed during a partnership. Such situations may involve:

• superannuation agreements made under pt VIIIAB of the Family Law Act;

• contributions under reg 6.44 of the SIS Regulations; or

• self-managed superannuation funds.

Superannuation agreements

19.26 Parties to a marriage or to a de facto relationship (contemplated or actual) may make a binding agreement in respect of how their property or financial resources are to be dealt with, or other matters.^[13] Under the Family Law Act, such an agreement is known as a ‘financial agreement’—if it concerns a marriage; and as a ‘pt VIIIAB financial agreement’—if it concerns a de facto relationship.

19.27 When the agreement, or any component of it, deals with either or both spouse parties’ superannuation interests (existing or not yet in existence) as if those interests were ‘property’, the agreement, or that part of it, is known as a ‘superannuation agreement’.^[14] A superannuation agreement is of no effect unless and until the spouse parties marry or enter into the de facto relationship (whichever was contemplated).^[15]

19.28 To be enforceable, the financial agreement or pt VIIIAB financial agreement, of which the superannuation agreement is a component, must have been made in accordance with the formal requirements set out in ss 90G or 90UJ respectively of the Family Law Act.^[16] Sections 90G and 90UJ require that:

• the agreement has been signed by all parties;

• each party has, before signing the agreement, been provided with independent legal advice from a legal practitioner about the effect of the agreement on that spouse’s rights and the advantages and disadvantages to them of making the agreement at that point in time;

• either before or after signing the agreement, the legal practitioner who has provided independent legal advice provides a signed statement to their client spouse party that attests to having given that advice;

• a copy of that signed statement has been given to the other party or that other party’s legal practitioner; and

• the agreement has not been terminated and has not been set aside by a court.

19.29 A court may, on application by a party to the agreement, order that the agreement is binding on the parties notwithstanding a failure to satisfy some of the requirements set down in ss 90G or 90UJ if it is satisfied that it would be unjust or inequitable if the agreement were not binding on the spouse parties.^[17]

19.30 A court may set aside a financial agreement or a termination agreement (an agreement terminating a financial agreement) if it is satisfied that any of the factors in s 90K(1) are established, or, in the case of a pt VIIIAB financial agreement or a pt VIIIAB termination agreement, it is satisfied that any of the largely similar provisions in s 90UM(1) of the Family Law Act are met.^[18]

19.31 Sections 90K(1) and 90UM(1) provide that, among other things, a court may make an order setting aside an agreement if the court is satisfied that:

• the agreement is void, voidable or unenforceable;^[19]

• in the circumstances that have arisen since the agreement was made it is impracticable for the agreement, or a part of the agreement, to be carried out;^[20]

• since the making of the agreement, a material change in circumstances has occurred (being circumstances relating to the care, welfare and development of a child of the marriage/de facto relationship) and as a result of the change, the child or—if the applicant has ‘caring responsibility’ for the child—a party to the agreement will suffer hardship if the court does not set the agreement aside;^[21] or

• in respect of the making of a financial agreement or pt VIIIAB financial agreement—a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable.^[22]

19.32 With respect to whether the agreement is void, voidable or unenforceable, the Further Revised Explanatory Memorandum to the Family Law Bill 2000 explains that:

These grounds reflect the principles of common law and equity, under which an agreement would fail because of lack of certainty, lack of intention to enter legal relations, or because the agreement is affected by duress, undue influence, unconscionability, misrepresentation or operative mistake. The inclusion of unconscionability as a separate ground is simply to make it clear that this ground is included within the grounds for setting aside an agreement.^[23]

19.33 Sections 90KA and 90UN of the Family Law Act direct a court to determine the validity, enforceability and effect of financial agreements and termination agreements according to the applicable principles of law and equity concerning contracts and purported contracts. Section 90MR(2) provides an equivalent provision for the enforcement of superannuation agreements.

19.34 Family violence has been held to constitute unconscionable conduct sufficient to set aside an agreement. For example, the decision of the Federal Magistrates Court in Moreno v Moreno is an example of a victim succeeding in having a financial agreement set aside under s 90K of the Family Law Act.^[24]

19.35 The somewhat limited scope for courts to set aside financial agreements (and therefore superannuation agreements) has been justified on the basis that parties will have obtained prior independent legal advice.^[25]

Submissions and consultations

19.36 In Family Violence and Commonwealth Law—Employment and Superannuation Laws, Issues Paper 36 (2011)(Superannuation Law Issues Paper), the ALRC asked whether the Family Court’s powers to set aside a superannuation agreement—whether a financial agreement or a pt VIIIAB financial agreement—under the Family Law Act are adequate to protect people experiencing family violence.^[26]

19.37 While there were limited submissions made by stakeholders in response to this issue, responses were mixed.

19.38 One submission advocated the inclusion of family violence as an additional ground for setting aside superannuation agreements under ss 90K(1) and 90UM(1) of the Family Law Act.^[27] Overall however, stakeholders submitted that the conditions required to be met before entering into a superannuation agreement—including the requirement that both parties obtain independent legal advice—offer sufficient protection to minimise the risk of coercion prior to a party entering into an agreement.^[28]

19.39 An additional protection emphasised in submissions is the power of the court to set aside agreements where unconscionable conduct has occurred. The Law Council of Australia (Law Council) suggested that this offers an adequate remedy where a person experiencing family violence has been coerced into entering a superannuation agreement.^[29]

19.40 Finally, the Law Council also noted the need to consider implications for third parties where that third party has taken action in reliance upon a superannuation agreement that is subsequently set aside. The Law Council suggested that

the court’s powers may need to be extended and further protection will need to be provided to superannuation trustees which act upon an order setting aside a previous superannuation agreement.^[30]

ALRC’s views

19.41 The ALRC’s preliminary view is that the requirements under ss 90G and 90UJ of the Family Law Act already go some way to protecting the interests of people experiencing family violence. In particular, the requirement that parties seek independent legal advice provides some assurance that the parties have had explained to them the consequence of signing a superannuation agreement. The ALRC also considers that, while somewhat limited, the powers of the court to set aside an agreement under ss 90K(1) and 90UM(1), specifically on the basis that the agreement is void, voidable or unenforceable, are likely to cover many situations involving family violence.

19.42 The provisions are broadly drafted and it would be difficult, given the nature and dynamics of family violence, to propose an amendment that would account for all situations in which one partner was intent on coercing or controlling the other into signing a superannuation agreement.

19.43 In any event, any proposal expanding the powers of the Family Court to set aside superannuation agreements would involve amendments to the Family Law Act that extend beyond the Terms of Reference. In addition, the ALRC has formed the view that any proposal aimed at amending the requirements in ss 90G and 90UJ of the Family Law Act would have systemic consequences, with an impact on parties to marriages and de facto relationships not involving family violence. Accordingly, the ALRC does not intend to make a proposal with respect to this issue.

Spousal contributions

19.44 Since 1 January 2006, eligible superannuation members have been able to request that their superannuation contributions be split with their ‘spouse’. The term spouse is defined to include:

• a person to whom the member is legally married;

• a person that the member is in a relationship with that is registered under certain state and territory laws (including registered same-sex relationships); and

• a person, of the same or different sex, who lives with the member on a genuine domestic basis in a couple relationship.^[31]

19.45 The payment of the split contributions to a member’s spouse is known as a ‘contributions-splitting superannuation benefit’.^[32] Maximum limits apply to the amount of superannuation that may be split in each financial year.^[33]

19.46 The SIS Regulations provide that superannuation trustees are not required to offer their members the option to split their superannuation contributions.^[34] If a superannuation fund does permit members the option to split superannuation contributions, a member may request that the superannuation trustee roll-over, transfer or allot an amount of the member’s superannuation benefits to a spouse.^[35]

19.47 In circumstances where family violence exists, it may be possible for one spouse to coerce the other into splitting their superannuation contributions under the superannuation contribution splitting regime. For example, this may occur where both parties are under preservation age and one spouse forces the other to split their contributions so that the superannuation is in the controlling spouse’s superannuation account. As a result of the possibility of such circumstances arising, in the Superannuation Law Issues Paper, the ALRC proposed two possible mechanisms by which to limit or ameliorate such coercion—providing that a trustee should consider whether member’s requests are done voluntarily; and, where the split has already occurred, some form of claw-back mechanism to recoup the coerced contributions.

Trustee obligations to consider coercion

19.48 Superannuation trustees have a range of duties and obligations and are subject to regulation at a number of levels.^[36]

19.49 In considering applications for contributions-splitting superannuation benefits, trustees are not currently required to consider whether the member’s request to transfer any benefits to the receiving spouse was done voluntarily or as a result of coercion. Consequently, in the Superannuation Law Issues Paper, the ALRC asked if a trustee should have an obligation to consider whether an application to transfer an amount to a spouse under the superannuation contribution splitting regime is being made as a result of coercion.^[37]

Submissions and consultations

19.50 Overwhelmingly, submissions in response to this question opposed the expansion of trustee obligations to consider the possibility of coercion in superannuation contribution splitting applications.^[38] Stakeholders opposed this expansion on the basis that it would not be appropriate to place this obligation on trustees as:

• it would be administratively burdensome;

• trustees lack the resources and expertise to make such determinations; and

• it may leave a decision on contribution-splitting applications open to legal challenge.^[39]

19.51 For example, the Law Council and the Association of Superannuation Funds of Australia (ASFA) opposed the introduction of any obligation on the trustee to consider coercion, suggesting that such investigations would be beyond the capacity, resources and expertise of the trustee.^[40] The Law Council submitted that:

It would not be appropriate for a trustee of a superannuation fund in receipt of a contributions splitting application to determine whether the request was made as a result of coercion. Beyond requiring a declaration from the applicant member, it is unclear how a trustee (other than the trustee of a self-managed superannuation fund) could identify a contributions splitting request which was made as a result of coercion.^[41]

19.52 ASFA argued that:

The fund trustee should not be expected or required to consider competing arguments between the spouses. This is not their role, and investigating the bona fides of both arguments raises the significant question of who should meet the costs of such enquiries. ASFA is also concerned that by making a decision in such a dispute the trustee opens itself up to potential legal action by one or both parties.^[42]

19.53 However, ASFA noted that should a trustee become aware that the splitting application was made as a result of coercion, the trustee should consider this as part of implementing its decision about the splitting application.^[43]

19.54 Conversely, two submissions did support the introduction of an obligation on trustees to consider if applications for superannuation splitting were being made as a result of coercion.^[44]

ALRC’s views

19.55 Superannuation trustees possess a number of duties and obligations and are subject to a range of regulatory requirements. In carrying out their fiduciary duty to act in the best interests of the member, it may be difficult for a trustee to determine whether granting a member’s application is in the member’s best interests, or to make enquiries about the motives and circumstances in which the application was made and, where it involves family violence, refuse the application. This is made particularly difficult given both granting the application (in terms of the concerns outlined about the depletion of superannuation entitlements) or refusing the application (where that may result in the member not having the financial resources to leave the relationship or take safety measures) may affect the member’s safety.

19.56 The ALRC acknowledges concerns about the practical difficulties that an obligation to consider the possibility of coercion in superannuation splitting applications would create in terms of administrative burden and additional cost, the lack of trustee expertise to determine such matters and the possibility that this may expose decisions to legal challenge. Accordingly, the ALRC’s preliminary view is that it would be inappropriate for trustees to be obliged to consider the motives behind a member’s application for contribution splitting.

19.57 However, the ALRC would be interested in hearing from stakeholders whether there are any other mechanisms through which trustees, or another body, could consider whether an application for superannuation splitting is being made as a result of coercion and take some steps to limit or ameliorate the effect of that on victims of family violence.

Claw-back provision

19.58 Where benefits have been transferred under a superannuation contribution- splitting regime as a result of coercion, a question arises as to whether, and by what means, the benefits could be recovered by the spouse who has been coerced.

19.59 As a result, in the Superannuation Law Issues Paper, the ALRC invited comment about whether a person experiencing family violence should be entitled to ‘claw-back’ benefits they have been coerced into transferring to a spouse under the superannuation contribution-splitting regime.^[45]

19.60 In practice, the primary means by which victims of family violence may be able to recover their superannuation entitlement where it has been transferred to their spouse, is through property proceedings in federal family courts regarding the distribution of assets following the breakdown of their marriage or de-facto relationship.

19.61 The Family Law Act permits federal family courts to make orders about the distribution of the property of parties to a marriage or de facto relationship upon the breakdown of that relationship.^[46] In making such orders, superannuation benefits transferred under the superannuation contribution-splitting regime as a result of coercion cannot be ‘clawed back’ as such, but may be taken into account in considering the contributions of the parties and ultimately in the distribution of assets between the parties.

19.62 In determining how property should be distributed, courts:

• identify the property, liabilities and financial resources of the parties—there is conflicting judicial opinion as to whether superannuation should to be listed and valued along with all other property at this stage (a ‘global’ approach); or whether superannuation interests should be valued separately from other items of property (a ‘two pools’ approach);^[47]

• identify and assess the contributions that the parties have made to the property, including financial and non-financial contributions and contributions to the welfare of the family;^[48]

• identify and assess the earning capacity, needs and child support obligations of each party;^[49] and

• make an order that is just and equitable in all the circumstances.^[50]

19.63 In making an order in relation to the distribution of property interests, a court is entitled to make orders in relation to superannuation interests.^[51] In particular, a court may direct that a superannuation interest be split between the parties.^[52]

19.64 An overarching issue arising out of the way in which superannuation should be considered by the court, both in assessing contributions, and ultimately, in the distribution of assets between the parties, is the extent to which family violence can be taken into account.

19.65 In the case of In the Marriage of Kennon the Family Court held that, when assessing a party’s contributions, the court can take into account a course of violent conduct by one party towards the other that has had a significant adverse impact on that party’s contribution or has made his or her contributions significantly more arduous than they ought to have been.^[53]

19.66 In addition, when considering the future needs of a party, the consequences of family violence—for example its effect on the state of the victim’s health, or physical and mental capacity to gain appropriate employment—can be taken into account.

19.67 In Family Violence—A National Legal Response,the ALRC and the NSW Law Reform Commission reviewed the current approach to dealing with evidence of family violence in property proceedings and subsequently recommended that the Australian Government should initiate an inquiry into how family violence should be dealt with in respect to property proceedings under the Family Law Act.^[54]

Submissions and consultations

19.68 Stakeholders were largely supportive of the introduction of some form of claw-back provision.^[55] Most submissions that expressed a view on the operation of a claw-back mechanism indicated a preference for it to be effected by way of court order.^[56] For example, ASFA submitted that:

such a provision should operate in a similar manner to Family law orders where the requirement on the trustee is merely to follow a lawful direction given by an appropriately constituted and authorised body.^[57]

19.69 However, stakeholders expressed uncertainty as to how a court order would operate in practice, with a concern about establishing precisely the circumstances in which a court would make such an order.

19.70 Stakeholders indicated there would be a range of issues to consider with respect to the practical operation of a claw-back provision. For example, one issue is in relation to the trustee’s responsibility for any appreciation or depreciation of the funds in the period between the transfer of a benefit under the superannuation contribution-splitting regime and the claw-back of that benefit. In particular, the Australian Institute of Superannuation Trustees (AIST) submitted that the trustee should not bear responsibility for any change in value of a benefit in that period.^[58]

19.71 Stakeholders also expressed concern about the adequacy of current processes to track benefits transferred to a spouse under the superannuation contribution-splitting regime. If a person who has split superannuation benefits as a result of coercion is to be able to ‘claw-back’ that amount, records of the amount of benefit that has been split must be accessible.

19.72 In consultations the ALRC heard that the current record keeping in relation to superannuation contributions splitting may not be adequate to allow these contributions to be tracked, particularly if a party’s superannuation benefit is later rolled over or transferred between superannuation funds.

ALRC’s views

19.73 While the ALRC considers that victims of family violence should be able to recover superannuation transferred under a superannuation contribution-splitting regime in circumstances of family violence, it is clear that any such mechanism would need to be provided for under the Family Law Act.

19.74 As outlined above, detailed consideration of, and proposals to amend, the Family Law Act go beyond the Terms of Reference for this Inquiry. The ALRC therefore considers the most appropriate approach to this issue is to propose, as recommended in the Family Violence—A National Legal Response, that the Australian Government should initiate an inquiry into the manner in which federal family courts consider family violence in property proceedings. The inquiry could consider, for example:

whether the Family Law Act should refer expressly to the impact of violence on past contributions and on future needs; the form that any such legislative provisions should take; and the definition of family violence that should apply for the purposes of the property proceedings under the Family Law Act.^[59]

19.75 In particular, the ALRC proposes that any such inquiry should include consideration of the treatment of superannuation in property proceedings involving family violence.

Self-managed superannuation funds

19.76 Self-managed superannuation funds (SMSFs) are funds where the trustees are the only members of the fund. That is, all members are natural persons who are trustees or directors of a body corporate trustee. However, most SMSFs do not have a corporate trustee.^[60] SMSFs are restricted to a maximum of four members.

19.77 The majority of SMSFs—more than 90%—are funds with two members.^[61] SMSFs constitute the largest sector within Australia’s superannuation sector by both number of assets and asset size.^[62] At 30 March 2010, there were approximately 423,000 SMSFs, representing 99% of all superannuation funds, and comprising over 30% of total superannuation assets.^[63] The SMSF sector has grown rapidly: in the five years to 30 June 2009, it has experienced an annualised growth rate of 20%.^[64]

19.78 The Super System Review concluded that ‘the SMSF sector is largely a successful and well‐functioning part of the system’.^[65]

Regulation and compliance

19.79 SMSFs are regulated by the ATO. The ATO publishes a range of guidance in relation to SMSFs.^[66] However, SMSFs are subject to a less onerous regulatory regime than some other forms of superannuation funds, because all members are considered to be directly involved in the management of the fund and are therefore considered to be able to protect their own interests sufficiently.^[67]

19.80 Accordingly, in circumstances of family violence involving the trustees/members of a SMSF, there is greater potential for one partner or family member to coerce another into making decisions or managing the SMSF in a certain way, and less external regulatory involvement or oversight to prevent that from occurring.

19.81 For example, the following ATO example outlines an example of where a dispute may arise between trustees and the negative financial consequences that may follow from such a dispute.^[68]

19.82 As foreshadowed above, there are a range of enforcement and compliance actions available to the ATO, including:

• accepting an undertaking to rectify the breach;

• making the fund a non-complying fund;

• disqualification of trustees; and

• in serious cases, civil prosecution of trustees.^[69]

SMSF professionals

19.83 There is no formal requirement to be a licensed SMSF adviser. There are a range of registration and licensing arrangements which apply to the professionals involved in advising on the establishment and management of SMSFs, including accountants, tax agents, fund administrators, lawyers and financial advisers.^[70] Developments such as the Future of Financial Advice reforms, amongst others, will be important in reviewing existing professional standards and training requirements as well as licensing exemptions.^[71]

Issues Paper

19.84 In the Superannuation Law Issues Paper, the ALRC suggested that, in light of the large and increasing share of the superannuation landscape now occupied by SMSFs, it is important to consider the potential for misuse of SMSFs in situations of family violence, particularly where economic abuse is a component of this violence.^[72]

19.85 In particular, the ALRC asked what mechanism might be introduced to better protect people experiencing family violence from financial abuse in the context of SMSFs and suggested that one mechanism might be the expansion of the SCT to hear complaints concerning SMSFs.^[73]

Submissions and consultations

19.86 Stakeholders responding to this question overwhelmingly opposed the extension of the jurisdiction of the SCT to complaints concerning SMSFs.^[74] Stakeholders who opposed the extension of the Tribunal’s jurisdiction expressed concern about funding and resource implications any extension would involve. In particular, they noted that the SCT is not resourced appropriately to cope with the increased workload that would be associated with dealing with complaints about the operation of SMSFs.^[75]

19.87 The nature and role of the SCT also formed the basis for opposition from stakeholders to the SCT dealing with complaints concerning SMSFs. Stakeholders emphasised that the administrative nature of the SCT makes it an inappropriate forum for dealing with family violence issues. For example, ASFA submitted that family violence in the context of a SMSF is more appropriately dealt with by courts with criminal and family law jurisdiction.^[76]

19.88 Further, the Law Council noted that:

The Superannuation Complaints Tribunal was established to resolve complaints about the decisions of trustees in superannuation funds. When the trustee is the trustee of an SMSF, the trustee will also be a member and a relative of the complainant. Any complaint about the trustee’s decision, particularly where family violence is in issue, will, very rarely be limited to its decision or conduct as trustee. It is very likely that any such complaint or dispute will also raise matters which would generally be dealt with by the criminal or family courts.^[77]

19.89 One submission, however, supported the extension of the SCT’s jurisdiction.^[78]

19.90 In consultations the ALRC heard that advice regarding the establishment and operation of SMSFs received from accountants, tax agents, fund administrators, lawyers and financial advisers is inconsistent and in some cases may not adequately explain the full implications of membership of such a fund, or the procedures involved in exiting a SMSF. Some stakeholders suggested that requiring these professionals to provide additional information to individuals establishing a SMSF may go some way to protecting trustees/members experiencing family violence.

19.91 Submissions received in response to the Superannuation Law Issues Paper did not canvas other mechanisms that might be introduced to better protect people experiencing family violence from financial abuse in the context of SMSFs.

ALRC’s views

19.92 The ALRC is of the view that family violence that arises in the context of an SMSF is better dealt with by courts with criminal and/or family law jurisdiction rather than the SCT, as in many cases it is likely the trustee will also be a family member and any complaint is unlikely to be limited to their decision or conduct as a trustee. In light of this and the role and resources of the SCT, the ALRC does not intend to make a proposal to expand the jurisdiction of the SCT to cover SMSFs.

19.93 The ALRC is conscious that many of the possible amendments to the regulation of the SMSF sector would involve sector-wide amendment and have a more systemic impact than just on victims of family violence. Consideration of the adequacy of regulation or guidance more broadly, or the obligations owed by professionals in the financial services sector are systemic issues and the ALRC considers that they are beyond the Terms of Reference for this Inquiry. The ALRC notes that, in line with the guiding principles articulated earlier in the chapter, systemic changes of this nature must be the product of coherent regulation and flexible and continual improvement focused on long-term change.

19.94 The ALRC recognises the importance of individual choice, as outlined in Chapter 2 and in the guiding principles for this chapter. This individual choice includes, for example, the choice to become a trustee in a SMSF. While with such choice comes increased responsibility for the consequence of these choices, the ALRC considers that family violence, in many cases, creates an exception to this principle and that victims of family violence who are also trustees of SMSF require additional protection.

19.95 As a result, there are a number of possible areas of reform to the regulation and operation of SMSFs to protect the safety of victims of family violence about which the ALRC would be interested in stakeholder comment, including in relation to ATO compliance decisions and provision of information.

19.96 For example, in light of the case study outlined above, the ALRC would be interested in stakeholder views on the ATO’s compliance options. In particular, the ALRC would be interested in hearing about the extent to which the ATO does, or could, consider family violence in determining the most appropriate compliance action in relation to SMSF trustees who fail to comply with superannuation or taxation law where that action may exacerbate the harm or disadvantage suffered by the member/trustee who is not the subject of compliance action.

19.97 The ALRC considers that ensuring individuals establishing SMSFs are provided with sufficient information about a range of matters may go some way to protecting people experiencing family violence. These matters include:

• setting up a SMSF—including creating appropriate safeguards;

• managing a SMSF—the importance of being actively involved in managing investments, accepting contributions as well as reporting and record keeping;

• trustee obligations, including compliance with relevant laws as well as possible compliance action by the ATO; and

• winding up a SMSF.

19.98 As a result, the ALRC would be interested in stakeholder submissions on the adequacy of material currently provided by the ATO in relation to these issues, and whether any amendment to existing material, or the provision of additional material or guidance, may assist SMSF trustees experiencing family violence.

19.99 The ALRC also suggests that the Australian Government (including the ATO, ASIC, and Treasury) and relevant professional bodies should consider the extent to which SMSF adviser and professional obligations or training could be amended, where possible and appropriate, to protect individuals experiencing family violence. This may be most appropriate in the context of the Future of Financial Advice reforms.

19.100 Finally, the ALRC would also be interested in submissions which more broadly address possible approaches or mechanisms through which people experiencing family violence may be protected in the context of SMSFs.