Protection from creditors is an unsung benefit of superannuation. Life does not always go according to Plan A.
I keep hammering it into my small business clients in particular that, while they may be passionate about their business and absolutely certain that it will succeed, they need to have a Plan B. Things can go wrong no matter how hard they work.
Superannuation is that Plan B in many cases. By putting a portion of profits away each year into super, they can minimise their tax obligations, save for retirement and protect some of their hard-earned wealth from unforeseen circumstances like a business collapse.
I always give the example of a client who had a successful software business who listened to me and put funds away in super yearly despite not wholly trusting the system. A dodgy overseas firm copied and made minor changes to his software and sold it for 10% of his price, thereby decimating his profits. He could lose everything, as the ensuing defence of his patents in court cases is wiping out his personal finances and those of his company. Even if he wins, they could just keep their assets overseas and he has no chance of recovering costs and damages. If he loses, they could chase his assets to recover their costs. The one thing protected is his superannuation, which will provide a decent, if slightly less comfortable, retirement.
The recent case of Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) [2016] FCA 846 shows what happens when superannuation, bankruptcy and the payment of death benefits intersect.
Background
Ms Morris became bankrupt 3-4 months after her husband, Mr Foreman, died. Mr Foreman held two policies with two different superannuation funds: AustSafe Super and Plum Super.
After becoming bankrupt, Ms Morris received three separate payments. Plum Super made a life insurance payment of $311,865.95, which is not controversial, as section 116(2)(d)(ii) of the Act provides that divisible property does not extend to life assurance policy proceeds of a bankrupt, or their spouse, received on or after the date of bankruptcy.
What was 'controversial’ was AustSafe Super’s payment of $45,392.48 and Plum Super’s payment of $67,240.27. Both funds made these payments to the bankrupt under discretionary powers, as Mr Foreman had not nominated any dependents or beneficiaries.
Ms Morris’s bankruptcy trustees applied to court in respect of these payments, arguing that the superannuation monies received by the bankrupt were after-acquired property that vested in them (as bankruptcy trustees) and was therefore divisible among the bankrupt estate’s creditors.
I am not a lawyer so I will not go into details of the argument but there is a good blog on the subject by Bryce Figot of DBA Lawyers – see more here and the actual case decision here.
In summary
Justice Logan held that prior to the superannuation fund trustees’ exercising their discretion in favour of Ms Morris, she had no interest in either fund. However, on this favourable decision, an interest was then created in the superannuation funds, and therefore these payments (totalling $112,632.75) made to Ms Morris (after bankruptcy) were held to be captured by s116(2)(d)(iii) and s116(2)(d)(iv) of the Act. Consequently, the bankruptcy trustees were unsuccessful with their application and Ms Morris retained the money.
So superannuation death benefits received by the bankrupt were protected from bankruptcy trustees.
I have not seen any previous guidance or authorities about the meaning and effect of the above sections of the Act. The decision seems to be consistent with the intention of legislation to protect and preserve benefits in respect of retirement for both members of funds as well as their spouses and dependants.
If you or your spouse are in business, or in a highly litigious profession, or high-risk investors, then talk to an advisor about your Plan B.
Liam Shorte is a specialist SMSF advisor and Director of Verante Financial Planning. This article contains general information only and does not address the circumstances of any individual. You should seek professional personal financial advice before acting.