Bankruptcy: What happens to my Superannuation?

Bankruptcy: What happens to my Superannuation?

A common question asked about being bankrupt is what happens to my hard earned superannuation? The response to this question will depend on when and how your superannuation was received.

Superannuation in a complying and regulated superannuation fund (subject to Sections 128B and 128C of the Bankruptcy Act 1966 (“the Act”)) is generally deemed to be protected property and therefore, not available to your creditors in bankruptcy.

Pursuant to Section 128B of the Act, superannuation contributions made to defeat creditors are void (and able to be clawed back by your Bankruptcy Trustee) if:

  • The contribution was made to eligible superannuation funds; and
  • The property would have formed part of the regulated debtor’s estate if the transfer had not been made; and
  • The main purpose of the transfer was to prevent the property from becoming a divisible asset in the bankruptcy and becoming available to creditors; and
  • The transfer occurred on or after 28 July 2006.

Further, pursuant to Section 128C of the Act, superannuation contributions made to defeat creditors are void if:

  • The contribution was made by a third party; and
  • The contributions, which would have been paid to the regulated debtor’s estate, was instead paid to their superannuation fund for their benefit such as payments made by the regulated debtor’s employer relating to their bonus, salary sacrifice, commission etc., and
  • The contributions were made under a scheme to which they were a party; and
  • The contributions would have formed part of the regulated debtor’s estate or would probably have been available to creditors if the property had not been transferred; and
  • The main purpose in entering into the scheme was to prevent the contribution from becoming a divisible asset in the bankruptcy and becoming available to creditors; and
  • The transfer occurred on or after 28 July 2006.

In the event that the circumstances listed in Section 128B or 128C of the Act occur, the Trustee may then decide to take action to recover the funds or assets contributed, for the benefit of creditors.

You are required to report to your Bankruptcy Trustee of any superannuation contributions made to your superannuation fund either by yourself or on your behalf. As part of the Bankruptcy Trustee’s investigations process, the Bankruptcy Trustee will request superannuation statements for the period of four (4) years prior to your bankruptcy to determine whether a voidable transaction had occurred.

Superannuation may not be protected property when:

Superannuation is not held in:

  • A complying and regulated superannuation fund;
  • An approved deposit fund; or
  • An exempt public sector scheme.

The monies or assets held in the fund may be claimable by the Bankruptcy Trustee.

The Super Fund Lookup tool can assist in determining whether a fund is regulated and complying.

Superannuation withdrawn from the fund before bankruptcy:

  • Claimable by the Bankruptcy Trustee; and
  • Bankruptcy Trustee can claim assets purchased with those funds.

In addition to the above, superannuation contributions received during or after bankruptcy are not claimable by the Bankruptcy Trustee if it is a lump sum payment. For example, during your bankruptcy, you purchased a car using funds from your superannuation fund. The car in this instance, is not claimable by the Bankruptcy Trustee. However, if you use funds from your superannuation fund to purchase a car before bankruptcy, the car is claimable by your Bankruptcy Trustee.

Further, superannuation received as income such as a pension will form part of your assessable income. If your income is over a set amount, you may need to make compulsory income contributions. 

Self-managed super funds

A regulated debtor is not permitted to be a trustee of a self-managed super fund. You must advise your Bankruptcy Trustee should you have a self-managed fund. You will be required to roll over your superannuation to an industry fund and notify the ATO within 28 days.

Impact of Coronavirus Economic Response Package on people in bankruptcy

There is no change as to how superannuation is treated if you received payments from your superannuation under the early access to superannuation provisions set out in the Coronavirus Economic Response Package. Economic supplement payments are not claimable by your Bankruptcy Trustee as income or as an asset; regardless of whether you received the package before or after the date of bankruptcy.

In the interim, if you have any questions, or your clients are experiencing financial distress, please contact Esther Tang or Neil McLean on (03) 9670 8700.

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