The superannuation regime in Australia was designed to ensure that those who have reached their older years have a sufficient nest egg to fund a comfortable retirement as a reward after a lifetime of hard work.

Therefore, it is paramount that when an individual is faced with the prospect of bankruptcy, they are well aware of how they can protect their superannuation.  So often, it is the only remaining savings they have once a trustee has recovered the divisible assets in their estate.

Individuals need to understand the basic treatment of superannuation in a bankruptcy so they can make an informed decision about going bankrupt and know what to do and what not do before going bankrupt.

An individual faced with financial hardship will often delay bankruptcy under a misconception that a trustee will take their superannuation. This is not the case. Generally, superannuation is protected under the Bankruptcy Act and a trustee cannot recover it; however important conditions apply.

Sometimes people take money out of super under the mistaken belief a trustee will get it anyway and pay their creditors rather than go bankrupt.

Withdrawing superannuation – timing is critical to bankruptcy

• The interest a bankrupt has in a regulated superannuation fund, approved deposit fund or exempt public sector superannuation scheme when the debtor becomes a bankrupt, is protected.
• A payment to the bankrupt from such a fund received on or after the date they became a bankrupt, is protected.
• Not only are the proceeds from the fund received after the debtor becomes a bankrupt protected, but any property acquired with those funds, is also protected.

Ensuring protection of super funds from the trustee in bankruptcy

• Any distribution from a super fund must happen after the debtor becomes a bankrupt. Funds distributed before the date of bankruptcy vest in the trustee. Likewise, any property acquired with super funds before the debtor became a bankrupt, vests in the trustee.
• Ensure any money distributed to the bankrupt is segregated from other funds in bank accounts or in the purchase of assets. This protects it from a trustee claiming it as part of after-acquired property.
• The super fund must be regulated. If it is compliant with the Superannuation Industry (Supervision) Act 1995 (SIS Act) and is managed in accordance with the super laws, then it is likely to be regulated. Any issues raised in an assessment or review by the Australian Taxation Office of the fund could implicate it as an unregulated super fund and hence exposed to a claim by a trustee in bankruptcy.
• Self-managed super funds (SMSF) are highly susceptible to becoming non-compliant as the owner of the SMSF controls the accounts and won’t always meet the requirements of the regulations. SMSF owners need to be extra careful and review their activities with the fund to ensure it is compliant.

Superannuation and Antecedent Transactions

• The Bankruptcy Act empowers trustees to recover funds paid into a super fund before the debtor becomes a bankrupt in certain circumstances. These are transactions that are usually made, or appear to be made, to defeat creditors.
• Unusual or large Deposits which are “out of character” made into the super fund before bankruptcy can be clawed back by the trustee.
• Payments into the debtor’s super fund by a third party to defeat creditors before bankruptcy, can also be recovered.
• A large deposit made into a super fund before bankruptcy could invoke the offence provisions of the Act, specifically offences for concealment of property – intent to defraud creditors.
• Unusual or large transactions to and from the super fund could result in the super fund being unregulated.

Superannuation and income contributions

Bankrupts are liable to pay income contributions to the trustee if they earn an annual income over the statutory threshold. The threshold increases two times a year based on the CPI index. Currently, the income threshold is $64,264.20* after tax for bankrupts with no dependents. The threshold increases for each dependent. 50% of the amounts earned by a bankrupt above the threshold are payable to the trustee.

The size of the annuity could impact income contributions payable by a bankrupt from a superannuation fund as a pension or annuity would be included as income for income assessment purposes.

Any annuity or pensions paid to the bankrupt from a super fund, retirement fund or approved deposit fund will be included in an income contribution assessment.

Importantly, any amounts deducted from salary for salary sacrificing will be added back to income in calculating income contribution liability.

Superannuation payments made by the employer as per the Super Guarantee Charge (SGC) into a super fund are not included in the calculation for income.

Key takeaways

Superannuation funds withdrawn from the account after bankruptcy are protected from the trustees. However, if superannuation is withdrawn prior to bankruptcy, it vests in the trustees. Therefore, the timing of the withdrawal has significant consequences.

For superannuation to be protected, the fund must be regulated. For example, out-of-character deposits or withdrawals from the super fund could render the super fund to be unregulated causing a trustee to make a claim against it.

Superannuation and the annuities that come from it are the fruit of a long life of hard work. Be sure to protect it in the event that you are struggling with financial hardship and talk with a suitably qualified professional before making any decisions.

If you would like to discuss your situation and have a professional review the overall impact of a bankruptcy on your superannuation, please contact our registered trustee Anthony Bagala at dVT Group on (02) 9633 3333 or by email abagala@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations, and insolvency (both corporate and personal).

* this is the current threshold as at 20 September 2022.