The interaction between bankruptcy, creditors and super are neither intuitive nor widely understood. In this article we explain how an individual’s super could be affected if they become bankrupt.
Any super benefits an individual receives before entering bankruptcy are available to creditors. In addition, any assets purchased with those benefits can be claimed and used to pay creditors.
Contributions made before bankruptcy
A contribution to a super fund can be clawed back and made available to creditors if the contribution was made in an attempt to defeat creditors. The conditions for determining if the contribution was made to defeat creditors include the following:
- The property would probably have become part of the transferor’s estate had the contribution not been made and therefore available to creditors.
- The contributor’s main purpose was either to prevent the transferred property being available to creditors or to hinder or delay the process of making property available for division among creditors.
- The contribution was out of character and not consistent with the existing pattern of contributions.
- It can be reasonably inferred from all the circumstances that at the time of the contribution the transferor was, or was about to become, insolvent.
Benefits in accumulation phase
In general, all property that belonged to a bankrupt at the start of their bankruptcy is divisible among the creditors of the bankrupt. However, an interest in a super fund is not generally considered property because it is held in trust. This provision is specifically contained in the Bankruptcy Act 1966, which states that the interest of a bankrupt in a superannuation fund is not considered property divisible among creditors.
The protection of super also extends to any lump sum received from a super fund. This means that a bankrupt who receives a lump sum from a super fund could keep that money in their own name and none of it would be available to creditors.
Benefits in pension phase
In contrast to lump sums, pension payments received from super funds are not fully protected.
Pension payments are treated as income and income only receives limited protection from creditors. The level of protection in relation to income is indexed twice a year in March and September.
As at 20 September 2019, the income thresholds are shown in the table below:
|
Number of dependants
|
Income limit
|
|
0
|
$58,331
|
|
1
|
$68,831
|
|
2
|
$74,080
|
|
3
|
$76,997
|
|
4
|
$78,164
|
|
More than 4
|
$79,330
|
Any income greater than the thresholds in the table above is available to creditors.
Case study
Alan is an undischarged bankrupt. He has no dependants and receives income from an account-based pension that was worth $2 million on 1 July 2019. Under the account-based pension rules, he draws the minimum annual pension of $80,000. This is Alan’s only source of income.
Using the table above we can see that because Alan has no dependants, $58,331 is his protected income limit. This means that $21,669 is available to his creditors (calculated as: $80,000 - $58,331 = $21,669).
If Alan commuted his pension back to accumulation phase, none of his super would be available to creditors, including any lump sum withdrawal he makes.
Conclusion
Understanding how super is treated in the unfortunate event of bankruptcy can help make the best of a bad situation.
Julie Steed is Senior Technical Services Manager at Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.