For the majority of Australians superannuation can be an individual’s biggest asset, the thought of losing it when declaring bankruptcy is a very authentic concern for the majority of our customers. With certain parts of the economy doing relatively well and other aspects passing through difficult economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t speak about 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. On the other hand mining areas in North Queensland and Western Australia have basically 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 introduced the question: was there an interest in a superannuation fund property? The law expressly 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 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 massive amount of super and it will be safe. The government formally explained 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 indicate that I can intentionally contribute extra 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 over and above your employers required 9.5% will be seen as an asset and obtainable to creditors simply because it will be considered as a preference payment. Essentially, if you sell your house and make $50,000 profit from doing so, 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 apply 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, don’t forget 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 instance, an undischarged bankrupt.
Ultimately this means if you have a SMSF, you will have 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 up to two years. Shortly after the person resigns/retires, the SMSF will most probably fail to fulfill 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 followed by terminating the SMSF. Or you can appoint 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 become another type of superannuation fund. Whilst RSE licensees can be expensive, this is advantageous where the fund has ‘lumpy’ non-liquid assets (namely property) that can not quickly 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 in place 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: Beware here, this could genuinely cost you! According to the discussion above, an interest in a superannuation fund is absolutely protected upon bankruptcy. The same applies to any lump sum gained from a superannuation fund based on the Bankruptcy Act. So as an 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 accepted from superannuation funds. They are not protected in the same way. Pension payments are treated 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.
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 recommend 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 Mackay on 1300 795 575.