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Effect of bankruptcy on superannuation

When an individual becomes bankrupt, the bankrupt’s property vests in the Bankruptcy Trustee with several exceptions. One exception applies to the bankrupt’s interest in a regulated superannuation fund, an approved deposit fund, or an exempt public sector superannuation scheme.

Superannuation benefits of a bankrupt as at the date of bankruptcy and payments of superannuation benefits to a bankrupt after bankruptcy are protected from being attacked by the bankruptcy Trustee but the protection does not apply to payments received from their superannuation fund before the date of bankruptcy because they are no longer funds in the regulated superannuation fund. If the payment is in the bankrupt’s bank account when bankruptcy occurs, the Trustee may seize those funds for the benefit of creditors. Case law has also confirmed that property purchased with superannuation money before bankruptcy will also vest in the bankruptcy Trustee.

Attacking Pre-Bankruptcy Superannuation Contributions

Before 28 July 2006, payments and property transfers to eligible superannuation funds were not subject to challenge but amendments to the Bankruptcy Act 1966 (Cth) provided that transfers made by a debtor were void if:

  • they were made to eligible superannuation funds of the Bankrupt;
  • the property would form part of the bankrupt estate if the transfer had not been made; and
  • the main purpose of the transaction was to defeat the asset being available to creditors.

Transfers made to a superannuation fund of the bankrupt by third parties on behalf of the bankrupt may also be attacked by the Trustee if they occurred under a scheme in which the debtor was involved. The intention to defeat the creditors’ interest in the property can be concluded from the circumstances of the transaction, whether the debtor was or was about to become insolvent and the result of the transaction.

If there is a history of personal contributions to eligible superannuation funds over a lengthy period, it may be difficult to argue there was an intention to defeat creditors.

Deeming provisions in the Act regarding actual or likely insolvency, to prove the intention of the debtor, also relate to transfers by third parties.

The Bankruptcy Act provides for a rebuttable presumption of insolvency if the debtor has not kept proper financial records.

The Bankruptcy Act also gives powers to Trustees that include the power to issue a superannuation notice freezing the superannuation account. A Trustee must satisfy the Official Receiver reasonable grounds exist to suggest a superannuation contribution is void. This notice is given to the Trustees of an eligible superannuation plan. Superannuation fund Trustees have civil and criminal protection for acts done in good faith and taxes and charges would apply to the contribution and be paid to the superannuation fund so Trustees are not left out of pocket if were not aware of the background to the payments.

The freezing notices affect the superannuation Trustees’ abilities to deal with the superannuation funds, except in specified circumstances. The allegation of void transactions must be resolved before funds can be paid out.

Income Contributions from Bankrupt

During the period of bankruptcy, a bankrupt can be assessed for contributions based upon income received by the bankrupt. Although the funds received from the superannuation fund after the bankruptcy starts are protected from seizure by the Trustee, the Bankruptcy Act extends the definition of “income” to include an annuity or pension paid to the bankrupt from a superannuation fund. A Trustee can add an annuity or pension payment to the Bankrupt’s other income during bankruptcy to determine liability to pay income contributions.

There is uncertainty between payments from superannuation received by an income stream as distinct from a lump sum payment and whether the latter (such as a lump sum employment termination payment) can be income under Section 139L of the Bankruptcy Act.

It may depend upon the superannuation trust’s deed or the circumstances in which the lump sum payment, or payments, may be made. Compulsory superannuation payments are not considered income for contribution calculation purposes but voluntary contributions, such as salary sacrificed by the bankrupt are considered income.

Australian Taxation Office Garnishee Notices

The Taxation Administration Act 1953 (TAA) gives the Australian Taxation Office (ATO) the power to recover tax liabilities and other debts payable to the Commonwealth from third parties who may owe money to, or hold money on behalf of, a tax debtor. The ATO can issue a Garnishee Notice to a superannuation fund but it is not usually effective until the debtor’s benefits are payable under the rules of the fund, e.g. if the debtor retires or dies.

Some case authority suggests that money due by an employee for future salary payments can be the subject of a valid garnishee notice. However an uncertainty arises regarding superannuation benefits if the debtor is unlikely to retire or die for thirty or forty years into the future, well after the bankrupt is discharged.

This article was prepared by Margaret Miller of Bell Legal Group. Margaret is a Partner in our Dispute Resolution, Insolvency and Litigation team. You can contact her on 07 5597 3366 or by sending an email to mmiller@belllegal.com.au