When gambling with COVID-19 support becomes a creditor win.
An estimated 2.6 million plus Australians accessed their superannuation via the early access scheme during the COVID-19 crisis onset. Treasury predicts $42 billion has been withdrawn. And despite the intentionally conservative amounts and criteria, over one million Australians withdrew their entire superannuation savings.
At Worrells, several bankrupts accessed their superannuation early. Mostly the withdrawals were used to help to pay household bills, rent and mortgage payments; however, we’ve also seen some unusual spending that may have far greater consequences for the bankrupt.
This article explores the following elements for those currently bankrupt, and those who may become bankrupt in the near future:
- During bankruptcy: early access superannuation amounts and gambling winnings.
- How superannuation is protected upon bankruptcy.
- When superannuation amounts are treated as income during bankruptcy.
- Can superannuation amounts become after-acquired property during bankruptcy?
- Post-bankruptcy gambling winnings.
- What does this mean for bankrupts?
During bankruptcy: early access superannuation amounts and gambling winnings
In a current bankruptcy file, we routinely assessed the bankrupt’s liability to pay compulsory income contributions to the bankrupt estate and found that the bankrupt received superannuation amounts under the COVID-19 early access scheme. Some of those funds were used to gamble, and successfully won some money!
So, how are superannuation amounts and gambling winnings treated after a bankruptcy commences?
These core principles are called into question:
- The extent that superannuation amounts are protected.
- When superannuation amounts are treated as income.
- Whether superannuation amounts are used to create ‘after-acquired property’.
How superannuation is protected upon bankruptcy
A bankrupt’s interest in monies held in a regulated superannuation fund is property that is not divisible among the bankrupt’s creditors under section 116(2)(d)(iii)(A) of the Bankruptcy Act 1966. Although, this protection is subject to certain Bankruptcy Act provisions, including where a bankrupt has made contributions to their superannuation fund to defeat creditors.
However, this protection does not necessarily extend to superannuation amounts a bankrupt receives after their bankruptcy commences and the amounts received may be treated as the bankrupt’s income or their after-acquired property.
When superannuation amounts are treated as income during bankruptcy
Superannuation amounts received as a pension are treated as the bankrupt’s income and are included in the bankruptcy trustee’s assessment of the bankrupt’s liability to potentially[1] pay compulsory income contributions to the bankrupt estate (under section 139L(1)(a)(i) of the Bankruptcy Act). However, in this bankruptcy file, the superannuation payments were not received as a pension and accordingly, were not treated as income.
Can superannuation amounts become after-acquired property during bankruptcy?
Divisible property in a bankrupt estate includes the bankrupt’s property that’s acquired after the bankruptcy commences (section 116(1) of the Bankruptcy Act).
If superannuation amounts are received by a bankrupt as a lump-sum payment, it is not divisible property in the bankrupt estate. Further, assets purchased with those superannuation amounts will not be divisible property. However, in this bankruptcy file, the bankrupt received superannuation amounts as multiple payments (not a lump sum) over a period and some of those amounts were used to gamble, which successfully won money.
In Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30, the bankrupt purchased shares from savings they accumulated during the bankruptcy period. Savings from income is included in the assessment of the bankrupt’s liability to pay income contributions and accordingly, is not treated as after-acquired property. In this case, the bankrupt’s income was below the relevant threshold amount and therefore the bankrupt was not required to pay income contributions into the bankrupt estate—however once those savings were converted into shares, it became after-acquired property and was “divisible” for the creditors’ benefit.
Applying the Di Cioccio case principles to this bankruptcy file, it may be considered that although the bankrupt’s superannuation was not treated as divisible property, once the bankrupt received the ‘early-access-scheme amounts’ over multiple payments, the Bankruptcy Act protection (section 116(2) of the Bankruptcy Act) may no longer apply; and those amounts may be treated as after-acquired property—and therefore divisible property in the bankrupt estate.
Although the Bankruptcy Act is not clear on the treatment of early access superannuation amounts received over multiple payments, it’s critical that bankrupts are aware under what circumstances their early access superannuation withdrawals may become available to their bankruptcy trustee for creditors’ benefit.
Post-bankruptcy gambling winnings
Gambling winnings are divisible property in the bankrupt estate under section 116(1) of the Bankruptcy Act.
Winnings from gambling activities during a bankruptcy do not fall under the meaning of income (section 139L of the Bankruptcy Act) and is therefore not assessed as income. Rather, gambling winnings are treated as after-acquired property.
The Di Cioccio case principles could also be applied in respect to winnings a bankrupt receives from gambling activities after their bankruptcy commences, whereby cash received or earnt during bankruptcy is converted into property and although this property has the same nature (i.e. cash) it’s received by a different means.
What does this mean for bankrupts?
As demonstrated above, bankrupts must provide information regarding their income and any after-acquired property to their bankruptcy trustee. Failure to do so constitutes an offence that the bankruptcy trustee may report to the Australian Financial Security Authority (AFSA). In circumstances where a bankrupt receives amounts from their superannuation under an early access scheme, to determine whether the amounts become after-acquired property, the bankruptcy trustee must consider:
- How the amounts were received (e.g. as a pension/income stream, lump-sum payment or payments over time).
- How the bankrupt used those amounts (e.g. to pay general living expenses or purchase/obtained after-acquired property).
Further, if a bankrupt disposes after-acquired property, this may also constitute an offence reportable to AFSA[2].
As always, your local Worrells partner is on hand to discuss insolvency scenarios and client circumstances to help you best support your client and to set proper expectations for how bankruptcy will impact and support them in the pursuit of financial recovery. Download our Guide to Personal Insolvency to get the FAQs when you need them on topics like: income contributions, divisible property in bankruptcy, and voiding superannuation contributions click here.
Related articles:
30 April 2020: COVID-19—early access to superannuation while bankrupt
31 January 2020: What happens to property acquired after a bankruptcy starts?
[1] Income contributions are subject to certain thresholds and dependant criteria: https://worrells.net.au/thresholds/
[2] Section 266 of the Bankruptcy Act.