Bankruptcy and superannuation: 3 cases where super might not be the asset protection strategy your clients think it is

Under bankruptcy, superannuation is usually a protected asset. It falls under the category of ‘non-divisible’ property.

If the superannuation fund is complying and regulated, the bankrupt can keep:

  • Most balances he/she receives on or after the bankruptcy date
  • Compulsory contributions from his/her employer.

In addition, any assets purchased by the superannuation fund (either wholly or substantially) fall under the status of ‘protected’.

Bankruptcy trustees are unable, therefore, to realise this property.

So, when is superannuation not an asset protection strategy?

The Bankruptcy Act provides a considerable amount of protection to a bankrupt’s superannuation against creditors. However, there are some exceptions.

Here are three common situations in which superannuation loses its protection and ‘non-divisible’ status.

1. If superannuation isn’t held in

  • a regulated fund
  • an approved deposit fund
  • an exempt public sector scheme

the bankruptcy trustee can claim any monies or assets held in the fund for the benefit of the bankrupt’s creditors.

The Federal Government’s Super Fund Lookup tool can be useful for determining whether a fund is regulated.

2. Any money withdrawn from the fund before bankruptcy is not protected, and can be claimed by the bankruptcy trustee.

Let’s say, for example, that a person withdraws $50,000 from their superannuation fund on 5 May and goes bankrupt on 20 June. If the bankrupt still has $20,000 of this superannuation withdrawal amount remaining in their bank account, the bankruptcy trustee can claim this cash at bank for creditors.

3. Out-of-character transactions involving contributions to the individual’s superannuation fund prior to bankruptcy, which would supposedly stop the property becoming a part of the bankrupt estate, can be voidable against the trustee in bankruptcy. If the transaction was made with intent to defeat creditors, the trustee can seek to recover these transactions for the benefit of the estate’s creditors.

The transaction can be deemed void if:

  • The transfer happened before bankruptcy (and after 28 July 2006, when the relevant legislation came into force)
  • The property would have otherwise become part of the bankrupt estate, and therefore available to creditors
  • the transferor’s main purpose was to:
    • make the property unavailable to creditors
      or to
    • hinder or delay the process of making the property available to the bankruptcy trustee.

The purpose of this legislation was to prevent people from moving assets to their super fund, declaring themselves bankrupt, and then relying on the legislation to prevent bankruptcy trustees from touching their superannuation funds/assets.

Here are two common questions that arise in relation to bankruptcy and superannuation that might affect your clients:

With Self Managed Superannuation Funds (SMSFs) can a bankrupt be a trustee or responsible officer?
No – a bankrupt cannot be trustee or a responsible officer of a SMSF. Once a person has been declared bankrupt he or she has six months to resign from this role. This grace period is permitted to allow the bankrupt member enough time to make arrangements without disadvantaging the other members.

If my client is considering bankruptcy, how could it impact his/her superannuation?
While there’s an official policy on how property is treated under the Bankruptcy Act, the truth is that there’s no definitive answer. Every client’s financial circumstances are different. What we do stress is that if a client is considering bankruptcy, he or she should get professional advice on how this may affect superannuation, as soon as possible.

The team at Rapsey Griffiths are very experienced in the implications of bankruptcy on SMSFs. So feel free to get in touch with us, to discuss your client’s individual situation.