Superannuation a useful way to protect personal assets of individuals

20/05/2013 by Michael Jones

Asset ProtectionIt is true that superannuation funds are ordinarily protected property in the event that an individual becomes bankrupt.  There is however and exception to this general principle where a superannuation contribution has been made to defeat the creditors.  In particular Section 128 B of the Bankruptcy Act makes specific provision in relation to transfers of property to a super fund where it can be inferred from all of the circumstances that at the time of the transfer, the transferor was or was about to become insolvent.  The kinds of transactions envisaged by these provisions relate to unusually large and irregular payments that are outside of the normal scope of the individual’s contribution to superannuation.

Unfortunately there are no cases decided on what this constitutes.

One problem that does occur is that if an individual becomes bankrupt after receiving a lump sum distribution from a superannuation fund.  The protection afforded by Section 116 no longer applies as the funds received are simply divisible property within the meaning of the Bankruptcy Act.  In these circumstances a debtor would be wise to delay receiving superannuation money until after the date of the bankruptcy.

Another problem occurs in relation to self-managed superannuation funds.  Pursuant to the superannuation legislation, an individual who is a beneficiary under a self-managed super fund must be a trustee of the fund, either individually or as a director of a trustee company.  Unfortunately the legislation prevents a person who is a bankrupt from being a trustee under of a self-managed superannuation fund and the Corporations Act, prevents an individual from being a director of a company if that individual is bankrupt.  This means that whilst the intention of the Bankruptcy Act is to protect superannuation from creditors, in the case of a self-managed super fund there are practical difficulties.  One solution for an individual in these circumstances is to roll their superannuation into a retail fund.  Whilst this is not an ideal solution, particularly in that the individual, during the course of the bankruptcy loses control over the investment strategy in relation to the super fund, it does not of itself erode the protected nature of the superannuation, afforded by the Bankruptcy Act in relation to superannuation.

Finally, if the bankrupt receives their superannuation benefits by way of an annuity or pension, that will be taken into account by the trustee in calculating the bankrupt’s income for the purpose of the Compulsory Income Contribution Scheme.  Therefore an individual facing bankruptcy is much better to receive a lump sum from his or her superannuation fund rather than an annuity.