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Understanding super & money
By Claudine Siou, Senior Technical Services Manager
An aim of bankruptcy law is to provide a ‘fresh start’ for a person after they have been discharged from bankruptcy. The concept of a fresh start is embodied in bankruptcy laws which release the person from the future liability of having to repay their existing debts, allowing them to start afresh and rebuild their financial security.
Superannuation has a ‘special’ status in bankruptcy as it is property that is not divisible among creditors. This excludes situations where super contributions are recovered by the trustee in bankruptcy (the trustee appointed to manage the bankruptcy).
This protected status is given to very few other assets and where it is granted - those assets may be restricted in value. Super has a ‘special’ status in bankruptcy law because there is no limit on the value that is protected. Super’s special status is highlighted by contrasting it with the family home which is not protected in bankruptcy but which has prime status in other areas, for example social security and tax.
The protection of super from creditors recognises that the accumulation of super over a person’s working life is instrumental in giving them a fresh start after bankruptcy.
Bankruptcy doesn’t only affect a person’s economic status, it also has other consequences.
Property owned by the bankrupt at the commencement of bankruptcy and property acquired by, or devolves on, the bankrupt, from the commencement of bankruptcy until discharge, vests in the trustee in bankruptcy and is divisible among creditors, subject to some exceptions.
Property owned by the bankrupt at the commencement of bankruptcy which vests in the trustee could include:
Property that vests in the trustee as soon as it is acquired by, or devolves on, the bankrupt during bankruptcy may include:
Superannuation contributions made, by a person who later becomes bankrupt, at any time before bankruptcy are void against the trustee, if the trustee can establish:
Superannuation contributions made by a third party, for example an employer or spouse, for the benefit of the bankrupt are voidable under similar conditions, where the contribution was made under a scheme, to which the bankrupt was a party. Employer salary sacrifice and spouse contributions made from a joint bank account could be captured under this provision.
Void means ‘voidable’ which generally requires the trustee in bankruptcy to undertake legal proceedings to have the contribution declared void by a court. This is an important point because unless the trustee takes action and succeeds in recovering the property, the contribution remains valid.
In determining whether the person’s main purpose in making the contribution was to defeat creditors:
Irrespective of circumstances which may clearly indicate the person was insolvent or was to become insolvent, the court ‘must’ consider whether the person had established a pattern of contributions. If the contribution formed part of an established pattern of contributions, it would not be seen as ‘out of character’ and therefore would not indicate that the person was aware of becoming insolvent. By establishing a pattern of contributions, an unlimited amount of superannuation funds may be accumulated and protected in bankruptcy.
Property which is protected in bankruptcy includes:
Apart from pensions, all payments from a super fund received on, or after, bankruptcy, are protected and are not divisible among creditors. The protection is not qualified by who receives the payment from a super fund and reflects that a payment may be made not only to a member, but also to a spouse, child or other dependant of a deceased member. However, only payments made directly from a super fund are protected.
A super death benefit may be paid to the legal personal representative (the executor or administrator of the deceased estate) in which case a beneficiary receives the payment from the deceased estate. The payment loses its character as a payment from a super fund and is not protected from creditors of a bankrupt beneficiary.
Bankruptcy of a beneficiary is an important aspect of estate planning for super. Provided the beneficiary is an eligible dependant, a binding nomination in favour of a bankrupt beneficiary will ensure the payment is made from a super fund and protected from creditors. Careful consideration is required when nominating a beneficiary who is at risk of bankruptcy. If the super death benefit is paid prior to bankruptcy, the payment is divisible among creditors. If the direct payment occurs after bankruptcy it is protected.
Protected money includes a payment from a super fund and any proceeds of life and endowment policies on the life of the bankrupt or their spouse, received on or after bankruptcy. Property which is acquired wholly or substantially with protected money is also protected and not divisible among creditors.
A bankrupt is required to make income contributions if their income exceeds the relevant threshold. This is currently $59,031.70 (after tax) for a person with no dependants and increases depending on the number of dependants. Half of any income which exceeds the threshold is a contribution for the benefit of creditors. Income is classified as ordinary income but may also include:
Bankruptcy statistics indicate that payments of income contributions are a far more effective way to recover property. Registered trustees recover almost three times the amount of money for creditors from income contributions than voidable transfers of property.1
A bankrupt is automatically discharged three years after the date the individual files their ‘Statement of Affairs’ with the Australian Financial Security Authority (ASFA). The period of bankruptcy can be extended up to eight years if the trustee objects to discharging the bankruptcy based on a range of grounds. Failure to comply with requests by, or disclose information to, the trustee are grounds for objection. Therefore a bankrupt has a strong incentive to co-operate during bankruptcy.
Making regular super contributions helps clients achieve their retirement objectives. The added benefit of establishing a regular pattern of contributions is that the client is reassured that if they become bankrupt, their superannuation will be protected from creditors. Upon discharge from bankruptcy, a client who has accumulated super in this way, may have ample resources to facilitate a fresh start.
1 Source: www.afsa.gov.au/statistics/annual-administration-statistics Monies administered by registered trustees under Parts IV and XI of the Bankruptcy Act.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
DisclaimerThe information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.