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IS MY SUPERANNUATION SAFE IF I GO BANKRUPT?

Fact Sheet

by Clare Corrigan23.07.19

One of the most commonly asked questions for individuals considering bankruptcy, is how it will impact their superannuation. People are usually concerned that the creditors will be able to take their hard-earnt retirement funds, which may have a serious impact on their future plans. 

Section 116(1)(a) of the Bankruptcy Act 1966 (“the Act”) defines the assets which are divisible amongst the creditors of the bankrupt estate to be: - 

All property that belongs to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of bankruptcy, and before his or her discharge.

Whilst this statement appears to include everything that is owned by the bankrupt at the time of bankruptcy up until their discharge, section 116(2) of the Act outlines assets which are specifically not available to the creditors. Included in this excluded asset provision is superannuation. A person’s superannuation funds and/or assets will be deemed “protected” from bankruptcy if it can be confirmed that it holds the following characteristics: 

1.    The superannuation funds are held in a regulated fund, in an approved deposit fund and/or in an exempt public sector scheme. If the superannuation is in an unregulated fund (including a self managed fund), then it loses its protection and may be available to be recovered to repay creditors of the bankrupt estate. 

2.    Any money withdrawn from the superannuation fund after bankruptcy, is usually protected. Similarly, if the deemed protected withdrawn superannuation funds are used to purchase an asset, the asset takes on the characteristic of protection also. On the other hand, any funds that are withdrawn prior to bankruptcy are an asset of the bankrupt estate. 

An example of this occurred in a recent bankruptcy matter. A bankrupt withdrew tens of thousands of dollars from her superannuation fund in the months prior to bankruptcy. She then “gifted” this money to her daughter. Because the superannuation was withdrawn prior to bankruptcy it lost its protected status and the trustee could recover the funds from the daughter to pay to the bankrupt’s creditors.  

3.    Regular payments and contributions to the superannuation fund made by employers are protected, however, transactions prior to bankruptcy which are made in attempt to defeat creditors by removing the funds from the bankrupt estate and seeking protection of the superannuation fund, can be voided by the bankruptcy trustee. This means that any transactions or contributions to a superannuation fund that were made with the intent to defeat creditors can be clawed back if: - 

a.    The transaction happened before bankruptcy and after 28 July 2006;

b.    The property or funds would have otherwise become part of the bankrupt estate, and as such would have been available to creditors;

c.    The purpose of the transfer was to make the property and/or funds unavailable to creditors and/or hinder or delay the process of making the property available to the bankruptcy trustee. 

The purpose of this section of the Act is to prevent people from moving assets to their superannuation fund, then upon declaring bankruptcy rely on the protection of the superannuation fund to avoid the assets being used to repay their creditors. 

In conclusion, superannuation funds are usually protected in bankruptcy, if it is in a regulated fund and the money being paid into the fund are legitimate deposits. . If you would like further information, assistance or guidance in relation to bankruptcy, you can contact us at Shaw Gidley now and talk with an experienced, independent advisor for a confidential and informal discussion in relation to your individual circumstances.