Is Superannuation protected from bankruptcy?
The current slowdown in the Australian economy is likely to result in a greater number of business failures and unemployment that could ultimately lead to bankruptcy.
In this post, the treatment of superannuation in the event of bankruptcy and what amounts can potentially be clawed by by the bankruptcy trustee will be briefly explored.
What is protected?
Prior to 1 July 2007, a bankrupt’s interest in a regulated superannuation fund up to their Pension Reasonable Benefit Limit (RBL) was classified as ‘exempt divisible property’ and was protected from creditors. With the abolition of RBL’s from 1 July 2007 theoretically the amount that can be protected from a bankrupts creditors is no longer limited.
This includes:
- the interest of a bankrupt in a regulated superannuation fund;
- any lump sum benefit paid to the bankrupt from such an interest on or after the date of bankruptcy
What is not protected ?
Superannuation benefits paid in the form of a pension however, do not receive the same level of protection as lump sums.
This is due to the fact that pension payments are not considered to be ‘exempt divisible property’ but are instead classified as ‘income’ – which receives only minimal protection. The amount of ‘income’ that is protected from creditors each year is based on the number of dependants of the bankrupt, as per the following information sourced from Insolvency and Trustee Service Australia website ( www.itsa.gov.au ) :
- 1 Dependant –> Income Limit of $41,823.60
- 2 Dependants –> Income Limit of $49,351.85
- 3 Dependants –> Income Limit of $53,115.97
- 4 Dependants –> Income Limit of $56,043.62
- More than 4 –> Income Limit of $56,880.10
The bankruptcy trustee can generally claim 50% of the income which exceeds these levels.
While these are general principles, certain amounts contributed to super – either by, or on behalf of the bankrupt – in the lead up to bankruptcy can still be ‘clawed back’ by the bankruptcy trustee. This is generally the case where the contributions have been made with the intention of defeating creditors.
Whether contributions are recoverable or not will generally depend on when the contributions were made (before or after 28 July 2006). Should you desire more information on this please contact us.
Conclusion
While it is possible that certain contributions can be clawed back by the trustee in bankruptcy, the balance of the client’s superannuation interest is generally protected from creditors. For this reason, people seeking to use superannuation as an asset protection strategy, should ensure they make consistent and ongoing super contributions to avoid any issues with the ‘claw back’ provisions.