|May 18, 2017||0|
For most Australians superannuation can be an individual’s biggest asset, the feeling of losing it when filing for bankruptcy is a very authentic concern for most of our clients. With certain components of the economy doing rather well and other parts going through tough economic times, bankruptcy numbers in Australia still continue to increase. Economists don’t talk about Australia’s two-speed economy much anymore, but it unquestionably 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 practically stopped dead and in some areas firmly stuck in reverse.
The Past: Superannuation and bankruptcy. Not very 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 handed over 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. However, 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 implies 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 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 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 available to creditors because it will be viewed as a preference payment. Basically, if you sell your house and make $50,000 profit from doing so, then shovel it off into your super fund, the trustee will deem 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 need 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 short, 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.
Essentially this means if you have a SMSF, you have to 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 lead to imprisonment for up to 2 years. Shortly after the person resigns/retires, the SMSF will very likely fail to satisfy the basic conditions needed to be an SMSF and will require a restructure.
Restructuring can include transferring the bankrupt’s superannuation interests to a regulated superannuation fund then terminating the SMSF. Or you can designate a registrable superannuation entity (RSE) licensee to act as trustee of the SMSF, wherein the fund would cease being an SMSF and would come to be another kind of superannuation fund. Eventhough RSE licensees can be costly, this is advantageous where the fund has ‘lumpy’ non-liquid assets (like property) that can not easily be rolled into another superannuation fund. Ordinarily, 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: Look out here, this could really cost you! As per the discussion above, an interest in a superannuation fund is utterly protected upon bankruptcy. The same applies to any lump sum acquired from a superannuation fund based upon the Bankruptcy Act. So for instance, you as a bankrupt who collects a lump sum of $10 million from your superannuation fund could keep that money and it will be safe. Nonetheless be warned the same is not true of pension payments acquired 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 twice a year, but as at 22 February 2017, the level is as follows:
Dependants Income Limit
over 4 $74,441.00.
Regardless of 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 important practical ramifications 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. In other words, your super must 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 Fresh Start Solutions Sunshine Coast on 1300 818 575.