ITSA recently released an article that dealt with voiding transfers to superannuation funds, and the tax implications of money withdrawn from the fund and paid to the trustee. Whilst we have had cause to look at the section while examining transfers of money in the months before a bankruptcy, this is the first time that we have seen this interaction with the ITAA 1997.
Section 128B of the Bankruptcy Act essentially mirrors section 121 of the Act by voiding transfers of property where the intention of the transfer was to defeat creditors. Where section 121 cover all sundry transactions, section 128B concentrates on transfers into superannuation funds. The Act says:
128B(1): A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a) the transfer is made by way of a contribution to an eligible superannuation plan; and
(b) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and
(c) the transferor’s main purpose in making the transfer was:
(i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or
(ii) to hinder or delay the process of making property available for division among the transferor’s creditors; and
(d) the transfer occurs on or after 28 July 2006.
As with section 121, that intention can be inferred:
128B(2) The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(c) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Because this section solely deals with superannuation contributions, it has further provisions that relate solely to superannuation:
128B(3) In determining whether the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(c), regard must be had to:
(a) whether, during any period ending before the transfer, the transferor had established a pattern of making contributions to one or more eligible superannuation plans; and
(b) if so, whether the transfer, when considered in the light of that pattern, is out of character.
The main point of the ITSA article was a private tax ruling obtained by the bankrupt in relation to the tax consequences of withdrawing money from the superannuation funds to satisfy a claim by a trustee. The article states:
“The bankrupt sought a ruling on the treatment for income tax purposes of an amount he withdrew from his superannuation fund and paid to the trustee. The amount was recovered from the fund on the basis that it was void against the trustee pursuant to section 128B of the Bankruptcy Act 1966 (the Bankruptcy Act). The amount would not have been an assessable superannuation benefit for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997) if the ATO concluded that it was an ‘amount required by the Bankruptcy Act 1966 to be paid to a trustee’ (paragraph 307.10(ab) of the ITAA 1997).”
In this case the trustee did not have to issue a 139ZQ notice or have to obtain a Court Order voiding the transfer, two common ways to enforce recovery of money or assets. The bankrupt conceded and withdrew the money and paid it to the trustee. This unfortunately for the bankrupt fell afoul of the word ‘required’ in the ITAA 1997. The ATO ruled that because the amount was not required to be paid – no 139ZQ notice or court order had been obtained – it remained, according to the ITSA article, “an assessable superannuation benefit for the purposes of the Income Tax Assessment Act 1997”.
The ITAA 1997 says that the amount must be required by some outside force to be made to the trustee. It would seem prudent for bankrupts that are going to concede that transfers to superannuation funds are void to settle on the basis that the parties obtain a consent order.