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Bankruptcy and Your Superannuation

Your superannuation is safe, it does not form part of your bankrupt estate

  • Monies you have accumulated over time to your Regulated Superannuation Fund, Approved Deposit Fund or Exempt Public-Sector Superannuation Scheme are protected and not available to your bankruptcy.
  • During the three years of bankruptcy, the Superannuation Guarantee money your employer pays to your Regulated Superannuation Fund is protected and does not form part of your bankruptcy.
  • If you are a high-income earner and will have to pay income contributions during bankruptcy, the Superannuation Guarantee monies your employer pays to your superannuation fund is excluded from your income when working out the amount of income contributions you will be required to pay.
  • If you are considering bankruptcy, it is important that you do not apply for access to funds from your Superannuation Fund prior to becoming bankrupt. Funds in your bank account when you become bankrupt will be lost to your bankrupt estate.
  • If you are bankrupt and are retired, receiving a pension from your Superannuation Fund, your Superannuation remains safe. The only thing you need to be aware of is that if your pension exceeds the threshold amount for payment of income contributions to your bankrupt estate, you will have to pay those income contributions. It is worth noting that the bankruptcy threshold amount for income contributions is based on after tax dollars, but your pension will most likely be tax free – meaning that the bankruptcy threshold will apply to the pension amount you receive.
  • If your Superannuation is with an Industry Fund, you do not need to do anything regarding your Superannuation when you become bankrupt.
Self-Managed Super Funds are not possible during your bankruptcy but there may be another option

If you have a Self-Managed Superannuation Fund (SMSF), you will need to transfer your Superannuation to a Regulated Industry Superannuation Fund (RISF) as you cannot have a SMSF whilst you are bankrupt. It is for you to select the RISF which will replace your SMSF. It is important that the Superannuation monies are transferred directly from your SMSF to the RIFS. 

Once you are discharged from bankruptcy you are able to again have a SMSF. It is only while you are bankrupt that you cannot have a SMSF.

The reason why you cannot have a SMSF during the three years of your bankruptcy is the Superannuation Industry (Supervision) Act 1993 (SIS Act) requires that a Regulated Superannuation Fund must have a Trustee (Section 19) and a person is disqualified from being a Trustee if bankrupt or subject to a Personal Insolvency Agreement (PIA) (Section 120). Also, It is not possible for the Trustee to be a company and you remain as director of that company as the Corporations Act 2001 (Section 206B(3))provides that you cannot be a director of a company whilst bankrupt.

This inability to have a SMSF can cause problems for persons who have assets in their SMSF that are not readily saleable. The good news is that Section 17A of SIS Act provides that you have 6 months from the date of bankruptcy to realise the assets of the SMSF and pay the monies to your chosen RIFS. If you do not wish to close down your SMSF you can consider becoming bankrupt and then proposing a commercial offer (a better result for creditors than bankruptcy) to your creditors under Part 4 of the Bankruptcy Act. If your creditors accept your offer, your bankruptcy is annulled. The SIS Act does not disqualify you from being a director of your SMSF if you are subject to a Scheme with your creditors under Part 4 of the Bankruptcy Act. I will give you an example;

Example

A. Tom had $280,000 in liabilities due to a failed business venture. His half share of the equity in the family house was $60,000, his financed car had a payout which was $8,000 more than the value of the car and his SMSF had a property worth $400,000 which Tom believed could increase in value due to the unique location of the property. Tom did not want to sell the property owned by his SMSF. Tom proposed a Part 4 Scheme to his creditors where his wife offered creditors $80,000 to be paid by monthly instalments over 36 months. A meeting of creditors was convened, creditors accepted Tom’s proposal, his bankruptcy was annulled, house was saved, and Tom was able to keep his SMSF as he legally was able to be Trustee. 

Tip 

SMSF’s are regulated by the Australian Taxation Office (ATO). When you become bankrupt you will need your Superannuation advisor to lodge Form NAT 3036 with the ATO. This Form is required to be lodged within 28 days of your bankruptcy. This Form can be accessed by googling ‘ATO Form NAT 3036’

If your SMSF has a corporate Trustee, you will need to lodge Form 296 with ACIS, advising of your bankruptcy. This Form can be accessed by googling ‘ASIC Form 296’

Superannuation, Bankruptcy and Retirement

For those who are at or near retirement age, having funds in your Superannuation Fund can significantly improve your results that you can achieve from bankruptcy. The reason for this is once you are bankrupt and legally able to access funds from your Super Fund, those funds you receive are protected and not available to your bankrupt estate. Further, assets you may purchase with those funds from your Superannuation Fund are also protected. This creates the opportunity for persons who are retired or approaching retirement to create a better retirement for themselves. Let me give you some examples of what people have done;

Examples

A. Peter and his wife Jill were at retirement age, owned a house worth $425,000 and the mortgage was $425,000. Over the years the debt on their credit cards had built up and Peter had credit card debt of $180,000 and Jill had credit card debt of $230,000. They were both earning a good income, but their incomes were eroded by maying minimum payments on their credit cards. Peter had Superannuation of $230,000 and Jill $200,000. 

Peter and Jill were distressed that they could not afford to retire and keep paying the minimum payments on their credit cards. They were distraught with the thought of losing their home but also had concerns that they would not be able to keep up with the mortgage payments once retired. 

Peter and Jill filed for bankruptcy. Their credit card debt was caught by their bankruptcies. As their house had no equity, they used their super funds to pay a small amount to their bankrupt estates to release their house from their bankrupt estates and used the balance of their super funds to payout the mortgage on their house. Bankruptcy had enabled them to retire with no debt, own their home and receive the pension. 

B. Tom and Maree were at retirement age and did not own their own home. Tom had debts of $63,000, his car was worth $5,000 and he had superannuation of $154,000. Maree had debts of $23,000 and did not own a car. Maree had superannuation of $180,000.

Tom and Maree filed for bankruptcy. Their credit card debt was caught by their bankruptcies. They drew down the money from their Superannuation Funds and purchased a two-bedroom unit for $300,000. Bankruptcy enabled them to retire with no debt, own their home and receive the pension.

C. David and Jane were at retirement age, but excessive debt was stopping them from retiring. It had always been their dream to retire and caravan around Australia. They had a caravan which they owned and lived in which was worth $60,000. The caravan was parked in their daughter’s yard. David’s 4WD had recently blown its motor and David thinks that it’s not worth repairing. Janes car is worth $4,000. David has debt totalling $89,000 and superannuation of $63,000. Jane has debt of $120,000 and superannuation of $128,000. David and Jane needed to keep working to be able to service their debt. 

David and Jane filed for bankruptcy. Their liabilities were caught by their bankruptcy. As their super monies were protected once they became bankrupt they were able to access their super to buy their caravan from their bankrupt estates and buy a new 4WD to tow the caravan. They are now receiving the pension and are having a great time travelling around Australia.

Superannuation, Bankruptcy and Incapacity, Severe Financial Hardship, Compassionate Grounds, Terminal Medical Condition

The protection bankruptcy provides to money you receive from your super fund after you have received your bankruptcy number, applies provided you can legally receive the funds from your superfund. You may have received the funds due to retirement, incapacity, severe financial hardship, compassionate grounds or a terminal medical condition, it does not matter. 

The funds received from your superfund during your bankruptcy are protected and the goods you spend that money on are also protected. 

Example

A. For example if a person were to have a credit card debt of say, $60,000 no assets and been diagnosed with a terminal medical condition, that person could file for bankruptcy, apply for access to funds held in the superfund due to terminal medical condition and then use that money to buy required medical equipment to improve quality of life.     

Superannuation may be relevant to your planning for your financial recovery

With your Superannuation being protected and not available to your bankrupt estate it can play a role in your financial recovery. This is particularly the case for middle aged and older persons. 

For those who are a first home buyer, whilst you are bankrupt you can save a deposit for a home using the Federal Governments - First Home Super Saver Scheme (FHSSS) Information on this can be obtained by googling ‘FHSSS’

For middle aged and older persons, we note that funds in your Superannuation Fund cannot be accessed till you reach your retirement age. However, consideration may be given to whether your recovery plan is to maximise funds in your Superannuation Fund rather than saving a deposit to buy another house and taking on a big mortgage without having sufficient time to payoff the mortgage prior to retirement. In this regard, everyone’s circumstances are different, and it is not realistic for us to go through all possible scenarios in this article. We recommend that you discuss and work out  your options with your financial advisor. To assist you we give below an example of how people utilised their Superannuation Fund in their recovery.

Example

Rob and Dianne had been through a difficult time. Their company had gone into liquidation, house was lost from security given for company debts and creditors of the company were chasing them for company debts they had guaranteed. 

Rob and Dianne filed for bankruptcy to protect themselves from the company’s creditors and claims the Liquidator may have against them. They then looked at how they could recover and start rebuilding their lives whilst they were bankrupt. Rob was 50 years of age and Dianne, 49 years of age. Rob had $480,000 in superannuation and Dianne $105,000. Their funds in superannuation were protected and not available to their bankrupt estate. Rob had obtained employment and was earning $150,000 pa and Dianne was earning $40,000 pa. Rob & Dianne wanted to retire by the time they were 67. After much budgeting and discussions with their financial advisor, they adopted the following strategy of renting till retirement, enjoying life and maximising their Superannuation. 

For Rob his employer was paying $14,250 to his Super and he was salary sacrificing from his wages to bring the contribution up to $25,000. He was also making a non-deductable contribution to his super fund of $10,000. Total yearly contributions to his super fund were $35,000 pa. When Bob was discharged from bankruptcy he was 53 and his Super had increased to $630,000. 

For Dianne her employer was paying $3,800 to her super and she was salary sacrificing from her wage to bring the contribution up to $10,000. When Dianne was discharged from bankruptcy she was 52 and her super had increased to $142,000. 

Once discharged from bankruptcy Rod and Dianne transferred their Super to a SMSF and the SMSF purchased a house for $550,000 for cash and rented the house through the local real estate agent to an independent person. The rent monies paid assisted with their accumulation of superannuation funds towards their retirement. Rob continued with $35,000 to his super and Dianne $10,000. 

Their plan is to own their own home once they retire and to accumulate significant savings and capital growth in their super fund for their retirement. They felt that by taking this approach they would maximise their quality of life now and in retirement and be able to retire owning their own home. 

You should obtain advise from your superannuation adviser before purchasing property in your self-managed super fund.

We Are Here To Help

We hope we have assisted you. We are here to help you Understand Bankruptcy. If you would like to discuss your situation, give us a call on 1300 794 492 or email hello@understandingbankruptcy.com.au