For many Australians superannuation can be an individual’s biggest asset, the notion of losing it when filing for bankruptcy is a very legitimate concern for many of our clients. With certain components of the economy doing pretty well and other parts undergoing tough economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t refer to Australia’s two-speed economy much anymore, but it undoubtedly still is two-speed. With the help 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. Nevertheless mining areas in North Queensland and Western Australia have pretty much 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 an ambiguous 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 indicated 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 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 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 imply that I can willingly contribute extra 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 your employers required 9.5% will be considered an asset and available to creditors given that it will be considered as a preference payment. In short, 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 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; 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. 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, like 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 6 months after declaring bankruptcy. Failure to do so can result in imprisonment for a maximum of 2 years. Shortly after the person resigns/retires, the SMSF will possibly 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 then terminating the SMSF. Or you can elect 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 turn into another form of superannuation fund. While RSE licensees can be expensive, this is advantageous where the fund has ‘lumpy’ non-liquid assets (including property) that can not promptly be rolled into another superannuation fund. Normally, an individual 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 regardless of how much?
Answer: Take care here, this could seriously cost you! Based on the discussion above, an interest in a superannuation fund is absolutely protected upon bankruptcy. The same applies to any lump sum acquired from a superannuation fund based upon the Bankruptcy Act. So for example, you as a bankrupt who receives a lump sum of $10 million from your superannuation fund could keep that money and it will be safe. However be warned the same is not true of pension payments accepted from superannuation funds. They are not protected equally. 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.
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 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 encourage you to give us a call and we will point you in the right direction. In other words, your super needs to 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 Gympie on 1300 795 575.