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20 Jan 2016

Is Superannuation sacred?

READ TIME

3 min

Apparently not, the ATO can take it

When researching what happens when a SMSF member goes broke, I wondered if the ATO could ever get to your superannuation in the event you owed them money. This is what I found out.

The ATO is empowered to collect monies owed directly from third parties who owe/hold money to/for the debtor (section 260-5 in schedule 1 of the TAA). It seems that third parties include superannuation funds.

To collect monies from a third party the ATO issues what we know as a garnishee notice. The ATO’s policy on how it uses a garnishee notice is set out in guideline PS LA 2011/18. It says that a garnishee notice may be served on a super fund, but it will not be effective until the tax debtor’s benefits are payable under the rules of the fund (e.g. retirement or death). Generally, a notice served on a super fund will request payment as a lump sum unless the pension/annuity payable can guarantee repayment within a satisfactory period.

As the bankruptcy trustee for Denlay, I am aware of one court case regarding the ATO garnisheeing super funds (Denlay & Anor v FCT 2013 ATC 20-382). However, the case doesn’t really help because while the garnishee notices were quashed, it was on a point related to the case not related to the TAA or the ATO’s policy guideline.

There is a case on the ATO issuing garnishee notices on third parties for monies that are not presently due (Dinning v FCT 1999 42 ATR 299). The third party was an employer and the money was for future salary payments. The court upheld the garnishee notice in that case, so there is no reason to suspect that a garnishee notice on super monies due in the future won’t be valid.

How can you avoid super funds being garnished? Well:


  • Pay your taxes. Obvious, but I had to say it.
  • Don’t put money in super. Not smart, not possible if you are a PAYG employee, or not really going to help because no matter where you hold funds in Australia the ATO can probably get to it.
  • Put your money into an overseas superannuation fund. Interestingly garnishee notices seem to only work within Australia.
  • The TAA refers to a third party who ‘holds money’ for the tax debtor. Possibly there is some argument for the lawyers that a super fund with only real property in it—is not a third party that holds money. Certainly the ATO doesn’t have the power to require the super fund to convert the real property to money just so it can satisfy a garnishee notice.
  • Declare bankruptcy before the ATO issues the garnishee notice, because the ATO won’t issue these after you are declared bankrupt. If the ATO has issued a garnishee before you are declared bankrupt then the notice still applies, but only to amounts that were due prior to the date of bankruptcy.

In essence superannuation is not as sacred as what we are led to believe, because the ATO can garnishee super monies to pay outstanding taxes.

To read ‘Self managed super funds and insolvency’, click here

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