For many Australians superannuation can be an individual’s biggest asset, the idea of losing it when declaring bankruptcy is a very authentic concern for many of our clients. With certain components of the economy doing fairly well and other areas undergoing difficult economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t discuss Australia’s two-speed economy much anymore, but it unquestionably 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. Nevertheless mining areas in North Queensland and Western Australia have virtually stopped dead and in some areas firmly stuck in reverse.
The Past: Superannuation and bankruptcy. Not very long ago, the Bankruptcy Act 1966 ruled that all property (including superannuation) that belonged to a bankrupt at the beginning of their bankruptcy was to be given to their creditors. This brought up the question: was there an interest in a superannuation fund property? The law specifically answered this question with a dubious 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 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 marked 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 means 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 suggest that I can willingly contribute excess funds to my superannuation before I file for bankruptcy and it will be safe?
Answer: No. Although these changes protect your superannuation, 100% voluntary contributions above your employers required 9.5% will be viewed as an asset and attainable to creditors simply because it will be deemed 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 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; 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, for example, an undischarged bankrupt.
In reality 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 6 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 likely fail to meet 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 and then terminating the SMSF. Or you can designate a registrable superannuation entity (RSE) licensee to act as trustee of the SMSF, at which time the fund would stop being an SMSF and would emerge as another kind of superannuation fund. Even though RSE licensees can be pricey, this is advantageous where the fund has ‘lumpy’ non-liquid assets (for instance property) that can not freely 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 regardless of how much?
Answer: Beware here, this could genuinely cost you! Based on the discussion above, an interest in a superannuation fund is utterly protected upon bankruptcy. The same applies to any lump sum obtained from a superannuation fund in accordance with the Bankruptcy Act. So for example, you as a bankrupt who acquires a lump sum of $10 million from your superannuation fund could keep that money and it will be safe. That being said be warned the same is not true of pension payments acquired from superannuation funds. They are not protected equally. Pension payments are considered as income and income only receives minimal protection from creditors. The specific 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.
Whatever you earn over these amounts annually, 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 important 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 advise 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 Experts Frankston on 1300 795 575.