Be wary of un-educated advisors
Superannuation is sacred…well, almost sacred. In most cases, superannuation cannot be realised as an asset in an individual’s bankrupt estate. Section 116 of the Bankruptcy Act 1966 deals with property that is divisible among creditors. Section 116(2) details assets that are not divisible and further section 116(2)(d) states that it is subject to sections 128B, 128C and 139ZU:
(iii) the interest of the bankrupt in:
(A) a regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993 ); or
(B) an approved deposit fund (within the meaning of that Act); or
(C) an exempt public sector superannuation scheme (within the meaning of that Act);
(iv) a payment to the bankrupt from such a fund received on or after the date of the bankruptcy, if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993 ;
It is important to note the words “subject to section 128B, 128C and 139ZU”.
A good asset protection and tax minimisation strategy may include paying funds into superannuation. In most cases, this will likely be effective. Recently, we recovered $50,000 paid into a superannuation fund prior to bankruptcy, which was recoverable under section 128B. Such payments are recoverable under section 128B if it:
- occurs in the relevant period;
was made from funds that would probably have become part of the estate if not transferred;
the transferor was insolvent at the time of the transfer; and
the payment could be considered out of character from the usual superannuation payments.
In other words, if the transfer looks a bit suspicious, it might be recoverable, even if it was to a superannuation fund.
In the above example, the individual was advised to make the payment to their superannuation fund before declaring bankruptcy ‘as it could not be recovered after bankruptcy’. Unfortunately, this advisor did not understand the impact of the meaning of “subject to section 128B, 128C and 139ZU”.