Bankruptcy & Superannuation 3 Critical Questions
For a lot of Australians superannuation can be an individual’s largest asset, the idea of losing it when filing for bankruptcy is a very real concern for the majority of our customers. With certain parts of the economy doing relatively well and other aspects experiencing tough economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t discuss Australia’s two-speed economy much anymore, but it definitely 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. Nonetheless mining areas in North Queensland and Western Australia have nearly 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 start of their bankruptcy was to be handed over to their creditors. This raised the question: was there an interest in a superannuation fund property? The law specifically answered this question with a dubitable 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 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 indicated 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 huge amount of super and it will be safe. The government formally described 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 mean that I can voluntarily contribute excess funds to my superannuation before I declare bankruptcy and it will be safe?
Answer: No. Even though these changes safeguard your superannuation, 100% voluntary contributions above your employers required 9.5% will be seen as an asset and obtainable to creditors since it will be deemed a preference payment. In short, if you sell your house and make $50,000 profit from doing so, 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 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; In the case of a self-managed super fund and bankruptcy, take note 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.
Ideally this means if you have a SMSF, you must retire or resign as the trustee, or director of the corporate trustee, prior to becoming bankrupt or within six months after filing for bankruptcy. Failure to do so can lead to imprisonment for up to 2 years. As soon as the person resigns/retires, the SMSF will likely fail to fulfill the basic conditions necessary 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, whereupon the fund would stop being an SMSF and would turn into another kind of superannuation fund. Although RSE licensees can be pricey, this is advantageous where the fund has ‘lumpy’ non-liquid assets (especially 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 instead 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 seriously cost you! Based on the discussion above, an interest in a superannuation fund is totally protected upon bankruptcy. The same applies to any lump sum obtained from a superannuation fund based on 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 a similar way. Pension payments are treated as income and income only receives minimal protection from creditors. The particular 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 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 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 recommend you to call us and we will point you in the right direction. Put simply, 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 Experts Newcastle on 1300 795 575.