If someone is in financial strife, one option is to declare bankruptcy. But what happens to their superannuation (super)?
The Bankruptcy Act 1966 defines super as a ‘on-divisible asset’ – in other words, it’s protected from creditors. Therefore, once someone has entered into bankruptcy, under certain circumstances, their super is safe and cannot be distributed to creditors.
Specifically, a bankrupt’s interest in a super fund is protected if the fund has made an elections to become regulated under section 19 of the Superannuation Industry (Supervision) Act 1993 (Cth) – and sections 128B, 128C and 139ZU of the Bankruptcy Act do not enable the bankruptcy trustee to recover super contributions.
However, if a fund is not regulated at the time of bankruptcy, there is an argument that the bankruptcy trustee can claim any monies or assets held in the fund for the benefit of the bankrupt’s creditors.
A point to be aware of is that even though super money is protected following bankruptcy, a bankruptcy trustee will investigate any funds that were transferred into a person’s super account, along with any transfer of funds where the contributor was a third party, if it is felt the transfers were carried out in a bid to defeat creditors. Trying to avoid paying debts by transferring money into super is not allowed.
When can you withdraw super?
When considering how upper is affected in bankruptcy, it’s important to understand the Superannuation Industry (Supervision) Act 1993, which governs super withdrawals, While the general rule is that super monies cannot be withdrawn until a person has satisfied a condition of release – usually the reaching of the preservation age – there are other conditions that allow access such as in cases of severe financial hardship.
The definition of severe hardship is when someone is unable to pay reasonable and immediate family living costs and has been on an eligible income support payment for a minimum of 26 consecutive weeks.
Then a withdrawal of a minimum of $1000 and a maximum of $10,000 is allowed from a super fund.
Only one withdrawal is allowed in any 12-month period. Tax may be payable on this amount depending on if tax was paid at the time the money was transferred into the fund. The super fund may also charge an early release fee.
What happens with self-managed superfunds?
If you have a self-managed super fund, then becoming bankrupt can have significant consequences for you, the SMSF and other members of the fund. If a trustee of an SMSF becomes bankrupt, they fall under the ‘disqualified persons’ provisions in the Superannuation Industry (Supervision) Act 1993, and must resign as a trustee as a bankrupt person cannot be a trustee or director of a corporate trustee in respect of their fund. Serious penalties exist if they continue to act as a trustee.
A bankrupt’s portion of an SMSF needs to be cashed out or rolled over into another fund, pursuant to section 17A of the SIS Act. The Act states: “the bankrupt who is a member of a SMSF is required to sell the assets, rollover or transfer his or her share of fund held in the SMSF to another fund within six months of the commencement of his or her bankruptcy.”
If you require any further information, please contact one of our tax accountants on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment or teleconference. Alternatively, please click here to submit an online enquiry form.