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Self Managed Super Fund (SMSF) Article
New Super Bankruptcy Rules

By Tony Negline.

This article may be out of date.

8th November 2006

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“How can I protect my assets if I were to be made bankrupt?”  This is a very common question.

The answer to this question is difficult to answer with any certainty in relation to superannuation assets.  In the last five years there have been a lot of announced changes in this particular area.  It is important to understand the historical development of the law and proposed law so that there are no misconceptions about what the current rules actually are.

Under current rules the trustee in bankruptcy is not permitted to use bankrupt’s super assets, or life insurance policies, up to the pension Reasonable Benefit Limit and any undeducted contributions – RBL – to satisfy outstanding creditors.  This policy was introduced over ten years ago.  One unintended consequence of this rule was that would-be bankrupts sought to increase their super through last minute undeducted contributions, in order to avoid these funds falling into the hands of their creditors.

In 2002 the government received a report which said that there were significant loopholes in the bankruptcy, family and tax laws that allowed high-income professionals to use bankruptcy as a means of avoiding the payment of outstanding tax debts.

In 2003 the High Court handed down its Cook v Benson judgment.  This had the effect of making super a safe place to put money in case of bankruptcy.

In December 2003, the government reacted to all these issues by saying that they would make a number of changes.  In particular the trustee in bankruptcy would have the ability to recover assets held in the name of the bankrupt’s spouse, or a property or trust, where the bankrupt has paid for and used the asset.  Additional superannuation contributions over $5,000 would be clawed back during insolvency proceedings. Additional powers were to be given to bankruptcy trustees to allow them to recover superannuation contributions which were made with an intention to defeat creditors.  These changes were designed to apply to super contributions made after 16 December 2003.

This area of the law went quiet until September 2005 when the Insolvency and Trustee Services Australia (ITSA) released a discussion paper on the government’s 2003 announcement.  The paper proposed a number of further changes to the government’s original statements.

The ITSA suggested that the bankruptcy trustees would not be able to recover amounts that exceed the value of the member’s account balance should they voluntarily leave a superannuation fund.  This was proposed so that the government’s 2003 plan would not infringe the Constitutional prohibition on the acquisition of property on anything other than on just terms.

Three additional rules were proposed.  Firstly, it was also proposed that any earnings on excessive contributions would also be available to the bankrupt’s creditor.  Further the excessive contribution threshold was to be increased to the equivalent of the maximum required for Super Guarantee compliance, or about $12,500 per annum.  Finally, contributions made “more than two years before the commencement of the bankruptcy would not be recoverable as ‘excessive’ where it can be shown that the bankrupt was solvent when the contributions were made.”

On the whole the superannuation industry did not like these ITSA proposals.  In fact some argued that the proposed administrative arrangements for these rules would have been unworkable.

Reluctantly the government went back to the drawing board.  On 28 July 2006 the government announced that it would again amend its superannuation and bankruptcy proposals and that the new rules would apply from that date.

The idea of recovering excessive contributions will not be implemented.  Instead the rules will allow a bankruptcy trustee to recover the value of contributions after examining the person’s history of contributions and whether the contributions in question are ‘out of character’.

The trustee will also be able to recover contributions made by a person other than the bankrupt for the benefit of the bankrupt where the bankrupt’s main purpose in participating in the arrangement was to defeat creditors.  The Official Receiver will be able to issue a notice to a superannuation fund in order to put a freeze on any money so that the bankrupt cannot rolling the money over into another fund.

One final point – we mentioned above that amounts up to the pension RBL as well as undeducted contributions cannot be claimed by the bankrupt’s creditors.  The government’s latest super changes do away with RBLs from July 2007 onwards.  One good question is to ask what will replace the pension RBL for bankrupts super assets?  Unfortunately no one knows the answer.  The government’s latest proposals seem to suggest that the pension RBL rule is no longer required.  This is based solely on the view that the trustee in bankruptcy will now be examining the pattern of super contributions made over a period of time and as a result the amount of money held in super is a bit irrelevant.

Clearly these rules are far from finalised and there is much flesh that is yet to appear on the new legislative body.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

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