When superannuation assets vest in the bankruptcy trustee

Protection is only available if you can prove it is owned.

Under 116(2)(d)(iii) of the Bankruptcy Act 1966, assets held in a regulated superannuation fund is not property that’s divisible among a bankrupt’s creditors. However, the Full Court of the Federal Court has recently shown, this protection will not be available if the assets are truly those of the bankrupt and not the fund. 

In Frigger v Trenfield (No.3) [2023] FCAFC 49 the Court held that certain assets “allegedly” held by a self-managed superannuation (SMSF) trust vested in the bankruptcy trustee pursuant to section 58 of the Bankruptcy Act. This matter involves a couple who were made bankrupt[1] following a creditor’s application.

The bankruptcy trustee identified significant assets, which the bankrupt couple disputed were held by them personally, but instead held by their self-managed superannuation fund (SMSF) and were therefore protected from the bankruptcy vesting provisions. The disputed assets included: 

• bank accounts

• shareholding

• real property.

The assets’ value could annul the two bankrupt estates. The bankruptcy trustee secured the assets by freezing the significant cash assets and placing caveats on the titles of the real property. The bankrupt couple then initiated legal proceedings to dispute that the assets vested in the bankrupt estates on the following grounds: 

• The assets were superannuation assets and were part of their respective allocated pensions, which vested in them but still formed part of their interest in the SMSF.

• Although the assets vest in them upon the preservation age, they were still held on trust by the SMSF.

• The disputed assets could be traced to income derived from the SMSF assets.

The Full Court determined that the disputed assets vested in the bankruptcy trustee for the following reasons:

• There was insufficient evidence to support the argument that the assets were contributed to and therefore held by the fund. Sufficient evidence includes:

  • Bank accounts: Evidence of the SMSF balance increasing as a result of a deposit.

  • Shareholding: Evidence of title passing.

  • Real property: Evidence of title passing.

• The documents the bankrupts provided did not support their argument that the assets were part of an allocated pension from the SMSF.

• Tracing the assets to the derived income was not appropriate to use in these circumstances as it usually applies in circumstances of misappropriation or other wrongdoing, which was not alleged in this case. However, in any event, there wasn’t sufficient evidence to apply the tracing principle to the assets.

In the end, the couple were ordered to pay their bankruptcy trustee’s costs, and because of the significant costs incurred, it is uncertain whether the assets will now be sufficient to annul the bankruptcy. Ultimately meaning that the couple will be left without any assets, instead of the surplus initially expected.

This matter provides a reminder that when individuals manage their own superannuation via a SMSF, they must ensure to keep detailed records of which assets form the SMSF and ensure there is clear evidence that the ownership of the asset has passed to the SMSF. The intention of disputed assets forming part of a SMSF will not mean much when evidence cannot support such claims to the bankruptcy trustee.

[1] The couple had separate bankrupt estates.