For a lot of Australians superannuation can be an individual’s biggest asset, the feeling of losing it when filing for bankruptcy is a very real concern for a lot of our clients. With certain parts of the economy doing relatively well and other areas experiencing difficult economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t discuss Australia’s two-speed economy much anymore, but it certainly still is two-speed. As a result of a long-term boom in the Sydney and Melbourne housing markets, these major centres are doing quite well running at a nice speed, with no sign of stopping anytime soon. Having said that mining areas in North Queensland and Western Australia have almost stopped dead and in some areas firmly stuck in reverse.
The Past: Superannuation and bankruptcy. Not very long ago, the Bankruptcy Act 1966 instructed that all property (including superannuation) that belonged to a bankrupt at the beginning of their bankruptcy was to be given to their creditors. This raised the question: was there an interest in a superannuation fund property? The law specifically answered this question with a dubious no – the interest of a bankrupt in a regulated superannuation fund was not property divisible among creditors. Then again, this protection of superannuation was not set in stone. In 2007 the laws changed, at that time the excess of a bankruptcy’s interest in a superannuation fund that exceeded the pension ‘reasonable benefit limit’ or (RBL) did constitute property that was divisible among creditors.
Post 2007 we have ‘Simpler Super’. The simpler super changes denoted a substantial change for superannuation and bankruptcy. The main change was, put simply, your superannuation is safe over and above the pension RBL amount. This implies that protection of superannuation upon bankruptcy is now absolute, technically, a bankrupt can now have a great amount of super and it will be safe. The government officially detailed the changes through its explanatory memorandum, Superannuation Legislation Amendment (Simplification) Bill 2007, as follows:
Currently, under the Bankruptcy Act 1966, a bankrupt’s interest in a superannuation fund up to the bankrupt’s pension RBL is protected from being divisible among creditors. A bankrupt’s superannuation interest in excess of the pension RBL automatically vests in the bankruptcy trustee. The amendments remove references to RBLs from the Bankruptcy Act 1966 to ensure consistency with the new Simplified Superannuation rules, which abolish RBLs with effect from 1 July 2007. This means that, from 1 July 2007, a bankrupt’s entire interest in a superannuation fund is protected, if you know what you are doing.
Frequently Asked Questions
Question: Does this imply that I can voluntarily contribute excess funds to my superannuation before I declare bankruptcy and it will be safe?
Answer: No. Despite the fact that these changes protect your superannuation, 100% voluntary contributions over and above your employers required 9.5% will be viewed as an asset and obtainable to creditors considering that it will be viewed as a preference payment. Essentially, if you sell your house and make $50,000 profit from doing this, then shovel it off into your super fund, the trustee will view that as a preference payment, or in plain English you paid your super fund $50,000 in preference to your creditors, so the trustee will claw back that excess from the fund, and allocate it towards your debts.
Question: What about my Self-Managed Super Fund (SMSF), is it also safe?
Answer: Yes. But there are things you will want to do once you are bankrupt; When it comes to a self-managed super fund and bankruptcy, bear in mind that the Superannuation Industry Supervision Act 1993 rules that a “disqualified person” must not be a trustee of a superannuation entity. In other words, if you are bankrupt you can no longer be a trustee of any trust including a super fund. A disqualified person includes a person who is an insolvent under administration, for instance an undischarged bankrupt.
Ultimately this means if you have a SMSF, you need to retire or resign as the trustee, or director of the corporate trustee, prior to becoming bankrupt or within 6 months after declaring bankruptcy. Failure to do so can lead to imprisonment for a maximum of 2 years. Shortly after the person resigns/retires, the SMSF will likely fail to satisfy the basic conditions needed to be an SMSF and will request a restructure.
Restructuring can include transferring the bankrupt’s superannuation interests to a regulated superannuation fund followed by terminating the SMSF. Or you can delegate a registrable superannuation entity (RSE) licensee to act as trustee of the SMSF, wherein the fund would cease being an SMSF and would transform into another type of superannuation fund. While RSE licensees can be expensive, this is more suitable where the fund has ‘lumpy’ non-liquid assets (for instance property) that can not readily be rolled into another superannuation fund. Ordinarily, a person who holds an enduring power of attorney in respect of a member can act as trustee of the SMSF instead of the member.
Question: I’m old enough to draw down my super, are all my payments to myself safe no matter how much?
Answer: Beware here, this could truly cost you! As per the discussion above, an interest in a superannuation fund is fully protected upon bankruptcy. The same applies to any lump sum obtained from a superannuation fund as mentioned by the Bankruptcy Act. So for example, you as a bankrupt who collects a lump sum of $10 million from your superannuation fund could keep that money and it will be safe. Having said that be warned the same is not true of pension payments obtained from superannuation funds. They are not protected identically. Pension payments are treated as income and income only receives minimal protection from creditors. The exact level of protection afforded to pension payments is adjusted for inflation twice a year, but as at 22 February 2017, the level is as follows:
Dependants Income Limit
over 4 $74,441.00.
Anything you earn over these amounts annually, 50% of the excess is payable to the trustee just like any income earned during bankruptcy and paid to creditors.
The difference in the treatment between lump sums and pensions has significant practical ramifications now that account-based pensions have been introduced; don’t presume it’s all safe and no matter what you do, get the right advice. At this point we recommend you to give us a call and we will point you in the right direction. In other words, your super must be handled with care. Every case has a distinct set of circumstances and between our firm and your financial advisor, we will secure the right outcome for you. If you need to know more, call Bankruptcy Experts Shellharbour on 1300 795 575.