Superannuation in bankruptcy - how do you keep it protected?

Under the Bankruptcy Act, a bankrupt’s interest in a regulated superannuation fund is protected and not available to their trustees. This protection extends to self-managed super funds.

But there are ways to lose this protection. You need to avoid making some basic mistakes in order to protect your superannuation in bankruptcy…

How do I lose super protection in bankruptcy? 

There are two main ways for a bankrupt’s super to be fair game for a bankruptcy trustee:

  1. If funds are withdrawn from the super fund prior to bankruptcy 

This may arise, for instance, if you withdraw funds from a super fund (prior to bankruptcy) to purchase a motor vehicle.

In this situation, the motor vehicle (if it was above the applicable threshold) would be available to the trustees to sell because the super never obtained its protected status (i.e. it was no longer super at the date of bankruptcy).

A further situation that may arise is where (for whatever reason) you direct your super fund to make a payment to someone prior to bankruptcy. This may be to pay a debt owed to someone or a gift to a spouse or family member.

This payment can be clawed back via Sections 120 and/or 122 of the Bankruptcy Act.

  1. Funds are transferred into the super fund prior to bankruptcy

Section 128B of the Bankruptcy Act provides that when a transfer of property is made to a super fund prior to bankruptcy, with the primary aim of hindering the trustees in realising that property or to prevent the property becoming available to the trustees, this transfer is void and the property may be recovered by the trustees.

If you are, or are about to become, insolvent at the time of making the transfer, you are automatically held to have made the transfer with the main intention of hindering or preventing the trustees from realising the property.

Just think about it. You’ve been receiving monthly super contributions of $300 for a couple years and two weeks before bankruptcy you decide to make a voluntary contribution of $20,000 to your super fund. It’s not difficult to work out why you’ve made the payment.

Bottom line: Leave your super where it is when facing bankruptcy. Don’t attempt to transfer funds to your super in an effort to defeat creditors.

Specific considerations for SMSFs?

With the growing popularity of SMSFs, it is not surprising that bankrupts often have SMSFs, especially when self-employed.

To have a compliant SMSF with a corporate trustee, the members of the SMSF need to also be directors of the corporate trustee. Given that a bankrupt is automatically disqualified from being a director, the SMSF becomes non-compliant.

To deal with this, there is a six-month timeframe for you to either convert your SMSF holdings into an industry fund (which is practically impossible if your SMSF owns real property) or arrange for your SMSF to be transferred to a small APRA fund.

A small APRA Fund is a professional trustee that manages your SMSF for a yearly commission. Amounts vary, based on the assets held in the SMSF.  Management fees can be up to $10,000 p.a.

Other super considerations?

If you are receiving regular weekly super payments (i.e. an annuity or pension) during bankruptcy, these payments can be included for the purposes of conducting an assessment of your income.

However, if you receive lump sum payments from your super fund after bankruptcy, not only are these payments protected, they are also not income for income assessment purposes.

If you are salary sacrificing super after your bankruptcy, these sacrifice amounts will be considered income (on top of your wage) for income assessment purposes. So, don’t think you’ll be able to lower your income in bankruptcy by salary sacrificing!

If you are facing bankruptcy and want to ensure your superannuation is protected, get in touch on 1300 906 966 or chat to us via the live chat window on our site.

For information on which other assets are protected in bankruptcy, see our recent article here.

Posted on 15-03-18 in Money management and bankruptcy.