Government policy is to encourage all Australians to provide for their old age through contributions to a superannuation fund. That policy is reflected in various tax breaks for super funds contributions and by a concessional tax rate on the profits of super funds.
The government’s policy of encouraging savings through superannuation also extends to ensuring that a person’s interest in a legitimate super fund is protected, in the event that he or she becomes bankrupt. In short, Section 116 of the Bankruptcy Act states that “divisible property” does not extend to a bankrupts interest in a regulated super fund, an approved deposit fund or an exempt public sector superfund. That protection also applies to a payment to a bankrupt from such a fund if received on or after bankruptcy.
Although we can understand why the legislation protects an entitlement at the date of bankruptcy, and a payment received during bankruptcy, we are at a loss to understand why super funds cashed in shortly before bankruptcy should not have the same protection. It seems to us that if a person’s interest in a super fund deserves to be protected that protection should extend to funds received before the bankruptcy.
From time to time we see business owners who have cashed in their super to buy or support their business. The important thing is for advisors to remind the business owner that the funds invested will not be protected if things go wrong.
Incidentally, very similar provisions apply to the proceeds of a life insurance policy. If received after bankruptcy they are protected, if received prior to bankruptcy they are lost. Again, why pre bankruptcy payments should be treated any differently to post bankruptcy payments?