For the majority of Australians superannuation can be an individual’s biggest asset, the notion of losing it when declaring bankruptcy is a very real concern for most of our clients. With certain aspects of the economy doing pretty 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 undoubtedly 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 nearly stopped dead and in some areas firmly stuck in reverse.
The Past: Superannuation and bankruptcy. Not too long ago, the Bankruptcy Act 1966 dictated 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 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 signifies that protection of superannuation upon bankruptcy is now absolute, technically, a bankrupt can now have an enormous amount of super and it will be safe. The government officially illustrated 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 freely contribute excess funds to my superannuation before I declare bankruptcy and it will be safe?
Answer: No. While these changes safeguard your superannuation, 100% voluntary contributions beyond your employers required 9.5% will be viewed as an asset and accessible to creditors given that it will be considered as a preference payment. Simply put, if you sell your house and make $50,000 profit from doing so, then shovel it off into your super fund, the trustee will see 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 put 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; 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, for example an undischarged bankrupt.
Ultimately this means if you have a SMSF, you must retire or resign as the trustee, or director of the corporate trustee, before becoming bankrupt or within 6 months after declaring bankruptcy. Failure to do so can result in imprisonment for a maximum of two years. After the person resigns/retires, the SMSF will probably fail to meet 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 and then 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 emerge as another type of superannuation fund. Although RSE licensees can be costly, this is advantageous where the fund has ‘lumpy’ non-liquid assets (for example property) that can not promptly be rolled into another superannuation fund. Almost always, an individual who holds an enduring power of attorney in respect of a member can act as trustee of the SMSF as opposed to the member.
Question: I’m old enough to draw down my super, are all my payments to myself safe regardless of how much?
Answer: Beware here, this could truly cost you! According to the discussion above, an interest in a superannuation fund is utterly protected upon bankruptcy. The same applies to any lump sum gained from a superannuation fund as mentioned by the Bankruptcy Act. So for 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 received 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 two times 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 just like any income earned during bankruptcy and paid to creditors.
The difference in the treatment between lump sums and pensions has considerable practical implications 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 encourage you to contact 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 Experts Port Macquarie on 1300 795 575.