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

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require trustees - even SMSFs - to offer a retirement income product to protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

Sponsors

Alliances

© 2021 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 ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.