Bankruptcy & Superannuation 3 Critical Questions

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Bankruptcy & Superannuation 3 Critical Questions

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For many Australians superannuation can be an individual’s best asset, the feeling of losing it when filing for bankruptcy is a very honest concern for the majority of our customers. With certain components of the economy doing rather well and other areas enduring tough economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t mention Australia’s two-speed economy much anymore, but it definitely 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. Nevertheless mining areas in North Queensland and Western Australia have practically stopped dead and in some areas firmly stuck in reverse.

The Past: Superannuation and bankruptcy. Not too 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 expressly 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 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 denoted 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 great amount of super and it will be safe. The government officially outlined 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 willingly contribute excess funds to my superannuation before I declare bankruptcy and it will be safe?

Answer: No. Despite the fact that these changes protect your superannuation, 100% voluntary contributions more than your employers required 9.5% will be considered an asset and obtainable to creditors considering that it will be viewed as a preference payment. Basically, 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 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 want to do once you are bankrupt; When it comes to a self-managed super fund and bankruptcy, always remember that the Superannuation Industry Supervision Act 1993 rules that a “disqualified person” must not be a trustee of a superannuation entity. In other words, 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 6 months after filing for bankruptcy. Failure to do so can result in imprisonment for a maximum of 2 years. Soon after the person resigns/retires, the SMSF will probably fail to fulfill the basic conditions necessary to be an SMSF and will demand a restructure.

Restructuring can include transferring the bankrupt’s superannuation interests to a regulated superannuation fund then terminating the SMSF. Or you can assign 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 turn into another form of superannuation fund. Whilst RSE licensees can be expensive, this is preferable where the fund has ‘lumpy’ non-liquid assets (for instance property) that can not promptly be rolled into another superannuation fund. In most cases, 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: Take note here, this could really cost you! According to the discussion above, an interest in a superannuation fund is fully protected upon bankruptcy. The same applies to any lump sum acquired from a superannuation fund in accordance with the Bankruptcy Act. So for instance, 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. Having said that be warned the same is not true of pension payments received from superannuation funds. They are not protected identically. Pension payments are considered 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

0 $54,736.50.

1 $64,589.07.

2 $69,515.36.

3 $72,252.18.

4 $73,346.91.

over 4 $74,441.00.

Anything you earn over these amounts yearly, 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 advise you to give us a call 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 Sunshine Coast on 1300 795 575.

By | 2017-10-27T01:29:27+00:00 May 18th, 2017|Bankruptcy, Liquidation|0 Comments

About the Author:

Director of Fresh Start Solutions and specialises in helping people free themselves from overwhelming debt. Whether it’s Bankruptcy, Liquidation, Insolvency Advice or simply General Debt Advice.