Super and the Slippery Slope of Bankruptcy

Stephen Harvey, current as of: 17 September 2015.

When our economy wobbles – a little like it is doing now! – it’s not uncommon for clients to worry about what might happen to their superannuation should they become bankrupt.

In fact, we hear the question often: Is a person’s super balance protected from creditors in the event of bankruptcy?

As a general rule, the answer is yes, although it’s not always that simple. We know that most people, when faced with the prospect of insolvency, will try to protect whatever assets they have, even going to the extent of deliberately hiding assets from creditors. This sometimes involves placing assets into their super fund in the hope they can’t be touched.

Your assets during bankruptcy

When a person becomes bankrupt their assets immediately vest in a trustee whose role is to collect and liquidate all of those assets and pay the available funds to creditors.

A person’s super contribution cannot, however, be touched except where the main purpose in making contributions or transferring assets to a fund is to prevent, hinder or delay the transferred property from becoming divisible among the bankrupt’s creditors.

To determine the main purpose for specific contributions, regard must be had to whether, during any period ending just before the transfer, the transferor had established a pattern of making contributions to one or more eligible superannuation funds. If this is not the case, then the transfer, when considered in the light of this pattern, may be considered out of character.

Here’s the take out

• Make sure your client’s SMSF is a regulated fund;
• To reduce the risk to personal assets, try to have your clients maximise concessional contributions – this will reduce tax outside super plus increase the pool of assets to fund retirement;
• Increase member balances by making maximum non-concessional contributions;
• Always use a corporate trustee – if a member becomes bankrupt, the SMSF assets do not need to be transferred from the old trustee to a new one;
• Have the shares in the corporate trustee held by a trusted non-member or by a family trust. Shares held personally are available to the trustee in bankruptcy; and
• Have your clients make regular and predictable contributions – establish a pattern of contributions (both concessional and non-concessional) to protect super from a trustee in bankruptcy. Sudden or unusual transfers or contributions are a red flag and are open to challenge.

For more information, please don’t hesitate to contact Legal Services on 1800 773 477.