For most Australians superannuation can be an individual’s largest asset, the notion of losing it when declaring bankruptcy is a very authentic concern for many of our clients. With certain areas of the economy doing pretty well and other components passing through difficult economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t discuss Australia’s two-speed economy much anymore, but it undoubtedly still is two-speed. Thanks 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. On the other hand mining areas in North Queensland and Western Australia have practically stopped dead and in some areas firmly stuck in reverse.
The Past: Superannuation and bankruptcy. Not too long ago, the Bankruptcy Act 1966 instructed that all property (including superannuation) that belonged to a bankrupt at the start 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 specifically answered this question with a doubtful no – the interest of a bankrupt in a regulated superannuation fund was not property divisible among creditors. Nevertheless, 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 marked a significant 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 huge amount of super and it will be safe. The government formally 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 willingly contribute excess funds to my superannuation before I declare bankruptcy and it will be safe?
Answer: No. Although these changes safeguard your superannuation, 100% voluntary contributions beyond your employers required 9.5% will be considered an asset and accessible to creditors since it will be deemed a preference payment. Simply put, if you sell your house and make $50,000 profit from doing this, then shovel it off into your super fund, the trustee will regard 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 need 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. Essentially, 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, such as an undischarged bankrupt.
Essentially this means if you have a SMSF, you ought to retire or resign as the trustee, or director of the corporate trustee, before becoming bankrupt or within six months after declaring bankruptcy. Failure to do so can result in imprisonment for a maximum of two years. Soon after the person resigns/retires, the SMSF will very likely fail to meet 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 and terminating the SMSF. Or you can designate a registrable superannuation entity (RSE) licensee to act as trustee of the SMSF, at which point the fund would stop being an SMSF and would transform into another form of superannuation fund. While RSE licensees can be pricey, this is preferable where the fund has ‘lumpy’ non-liquid assets (like property) that can not freely be rolled into another superannuation fund. More often than not, an individual who holds an enduring power of attorney in respect of a member can act as trustee of the SMSF as an alternative to the member.
Question: I’m old enough to draw down my super, are all my payments to myself safe irrespective of how much?
Answer: Take note here, this could definitely cost you! Based on the discussion above, an interest in a superannuation fund is completely protected upon bankruptcy. The same applies to any lump sum received from a superannuation fund as mentioned by the Bankruptcy Act. So as an example, you as a bankrupt who accepts 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 received from superannuation funds. They are not protected in the same way. Pension payments are regarded as income and income only receives minimal protection from creditors. The precise 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.
No matter what you earn over these amounts annually, 50% of the excess is payable to the trustee similar to any income earned during bankruptcy and paid to creditors.
The difference in the treatment between lump sums and pensions has significant practical implications now that account-based pensions have been introduced; don’t assume it’s all safe and no matter what you do, get the right advice. At this point we advise 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 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 Experts Whitsundays on 1300 795 575.