For the majority of Australians superannuation can be an individual’s greatest asset, the idea of losing it when declaring bankruptcy is a very real concern for a lot of our customers. With certain aspects of the economy doing quite well and other parts enduring difficult economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t talk about Australia’s two-speed economy much anymore, but it definitely still is two-speed. Due to 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. Nonetheless mining areas in North Queensland and Western Australia have just about stopped dead and in some areas firmly stuck in reverse.
The Past: Superannuation and bankruptcy. Not very long ago, the Bankruptcy Act 1966 determined that all property (including superannuation) that belonged to a bankrupt at the beginning of their bankruptcy was to be given to their creditors. This introduced the question: was there an interest in a superannuation fund property? The law expressly answered this question with an ambiguous no – the interest of a bankrupt in a regulated superannuation fund was not property divisible among creditors. Nonetheless, this protection of superannuation was not set in stone. In 2007 the rules 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 indicates that protection of superannuation upon bankruptcy is now absolute, technically, a bankrupt can now have a massive amount of super and it will be safe. The government officially defined 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 suggest that I can intentionally contribute excess funds to my superannuation before I file for bankruptcy and it will be safe?
Answer: No. Even though these changes protect your superannuation, 100% voluntary contributions over and above your employers required 9.5% will be viewed as an asset and available to creditors given that it will be viewed as a preference payment. To put it simply, if you sell your house and make $50,000 profit from doing this, then shovel it off into your super fund, the trustee will consider 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 apply 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 have to do once you are bankrupt; In the case of a self-managed super fund and bankruptcy, remember that the Superannuation Industry Supervision Act 1993 rules that a “disqualified person” must not be a trustee of a superannuation entity. Basically, 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.
Ideally this means if you have a SMSF, you need to retire or resign as the trustee, or director of the corporate trustee, before becoming bankrupt or within six months after filing for bankruptcy. Failure to do so can lead to imprisonment for up to two years. After the person resigns/retires, the SMSF will most probably fail to satisfy the basic conditions necessary to be an SMSF and will mandate a restructure.
Restructuring can include transferring the bankrupt’s superannuation interests to a regulated superannuation fund followed by terminating the SMSF. Or you can assign a registrable superannuation entity (RSE) licensee to act as trustee of the SMSF, at which point the fund would cease being an SMSF and would transform into another form of superannuation fund. Even though RSE licensees can be costly, this is advantageous where the fund has ‘lumpy’ non-liquid assets (for instance property) that can not easily be rolled into another superannuation fund. Normally, a person who holds an enduring power of attorney in respect of a member can act as trustee of the SMSF in place of the member.
Question: I’m old enough to draw down my super, are all my payments to myself safe irrespective of how much?
Answer: Be careful here, this could genuinely cost you! As per the discussion above, an interest in a superannuation fund is completely protected upon bankruptcy. The same applies to any lump sum collected from a superannuation fund based on the Bankruptcy Act. So as an example, you as a bankrupt who obtains a lump sum of $10 million from your superannuation fund could keep that money and it will be safe. Nevertheless be warned the same is not true of pension payments obtained from superannuation funds. They are not protected in the same manner. Pension payments are regarded 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.
Regardless of what you earn over these amounts each year, 50% of the excess is payable to the trustee the same as any income earned during bankruptcy and paid to creditors.
The difference in the treatment between lump sums and pensions has important 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 call us and we will point you in the right direction. In other words, your super needs to be handled with care. Every case has a unique 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 Advice Perth on 1300 879 867.