Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 328

Bankruptcy: can creditors take your super?

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.

 


 

Leave a Comment:

     
banner

Most viewed in recent weeks

The creator of the 4% rule and his own retirement

The 4% withdrawal rate in retirement is an industry standard, a level where a retiree could be confident of not running out of money. Its creator Bill Bengen explains its use in this interview with Michael Kitces.

Welcome to Firstlinks Edition 383

One of the downsides of Donald Trump commanding the headlines is that we skim over other significant issues. For example, few Australians read the China Daily News or coverage of its contents, missing official statements that are terrifying hundreds of Australian producers. China says Australia will 'pay tremendously' for its recent lack of respect.

  • 12 November 2020

Seven items your estate plan may have left out

Most people pay cursory attention to estate planning, limited to a will and maybe a chat with the children. Those who want to make their intentions clearer and easier for others should check these quick tips.

Graeme Shaw on why investing is at a pivotal moment

Company profits have not improved for many years but higher valuations have been driven by falling rates and excess liquidity. Conditions do not suit a value and contrarian manager but here are some opportunities.

Alex Vynokur: ETFs deliver what’s written on the can

Exchange Traded Funds have moved well beyond indexes to a range of sectors, themes, smart beta and active. They are attracting strong flows from both experienced investors and newcomers.

11 key findings on retirement dreams during the pandemic

A mid-pandemic survey of over 1,000 people near or in retirement found three in four are not confident how long their money will last. Only 18% felt their money was safe during a strong economic downturn.

Latest Updates

Retirement

Five ways the Retirement Review points to new policies

The Retirement Income Review goes much further than an innocent-sounding 'fact base', and is sure to guide policies in the run up to the next election. It will change how we think about retirement incomes.

Property

Steve Bennett on investing in direct property for the long term

As people stayed home during the pandemic, a bearish view swept over most property sectors, but many have thrived and prices have recovered rapidly. The best opportunities are in long leases with quality tenants.

Retirement

Retirement Review gives strong views on hoarding of super

The Review includes some profound findings, most notable that retirement income should include drawing down far more capital. Expect post-retirement products to proliferate under a Retirement Income Covenant.

Superannuation

Paul Keating on why super relies on “not draining the bath”

Paul Keating is the champion of compulsory superannuation as the central means of funding retirement. In the wake of the Retirement Income Review, he is at his passionate best defending the system, with Leigh Sales.

Latest from Morningstar

Is your portfolio too heavy on technology stocks?

Investors with heavy allocations to a broad US index should check how much is exposed to tech stocks, especially when valuations look a bit steep. It might be time to reallocate to other sectors or styles.

Investment strategies

Beware of burning down the barn to bury the debt

At some point, policymakers will turn to the task of deleveraging, to work off massive debt burdens built up during the pandemic. Australia is already ticking the boxes on many policies used in the past.

Superannuation

New bankruptcy rules may have a domino impact on SMSF pensions

During COVID, bankruptcy rules have allowed small businesses to trade while insolvent. It may mean an SMSF is hit by the collapse of a business leaving trustees struggling to meet their own legal obligations.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.