SMSF adviser logo

Is superannuation the safest vehicle?

By Chris Ketsakidis
June 02 2017
5 minute read
Is superannuation the safest vehicle?
expand image

The tax concessions offered by super funds may have taken a hit recently, but it’s worth remembering that superannuation still remains the best vehicle for bankruptcy protection.


Many Australians rely on their superannuation savings to provide them with financial security in retirement, but superannuation should also be a key plank of any asset protection strategy they have. This is especially true for SME business owners, for whom asset protection is a key consideration in any business or investment structure.

While much has been written about whether family trusts remain effective asset protection vehicles, the truth is, they are not as effective as superannuation. In light of this, let’s consider superannuation in a bankruptcy context.

The role of a trustee in bankruptcy is to administer the estate of a bankrupt by ascertaining and gathering any property owned and/or controlled by the bankrupt. In other words, they identify the bankrupt’s property and prevent any dissipation or other dealing that might defeat creditors’ interests. Once that’s done, the trustee is required to realise those assets and distribute the proceeds to creditors.

However, there are exceptions. Existing superannuation entitlements at the time of bankruptcy are precluded from being property divisible among the bankrupt’s creditors.  These include:

  • Existing interests in regulated superannuation funds;
  • Superannuation benefits paid to a bankrupt other than pensions (e.g. lump sum benefits);
  • Assets acquired with those protected superannuation benefits; and
  • Payment under a family law superannuation split.

Bankruptcy rules affecting contributions

What entitlements are protected?

As a corollary to the above, there are integrity measures in place to ensure contributions are not made to defeat creditors. For example, the anti-avoidance measures set out in sections 120 (concerning undervalued transactions) and 121 (transfers to defeat creditors), and the operation of Part IV Division 3 Subdivision B can operate to defeat such transactions and contributions by a bankrupt.

Subdivision B enables a bankruptcy trustee to recover contributions made with the intent or deemed intent to defeat a bankrupt’s creditors. It applies to contributions made by the member or by a third party such as a member’s employer where the employer is party to a scheme to make the contributions with the main purpose of defeating creditors.

To guard against the abuse of the generous carve-out given to superannuation entitlements, there are a number of anti-avoidance measures in place. In particular, two types of contributions are recoverable:

  • Those made to a superannuation fund plan by the bankrupt; and
  • Those made for the benefit of the bankrupt who is party to the scheme under which the contribution is made,

Where the main purpose of making the contribution was to prevent the transferred property becoming divisible among the transferor’s creditors or to hinder or delay the process of making property available for division among the transferor’s creditors.

A trustee-in-bankruptcy can commence recovery proceedings in respect of these types of contributions at any time, if the transfer occurred on or after 28 July 2006.

Main purpose of contribution

When looking at the main purpose of the contributions, two things may be taken into account – the member’s solvency at the time the contribution was made and any pattern of contributions. A court can infer that there was an intention to defeat creditors where the circumstances surrounding the contribution reasonably show that, at the time it was made, the person was – or was about to become – insolvent.

Moreover, the scheme is broadly defined in the legislation to catch any type of arrangement that a person may enter into to convert property directly payable to them into a superannuation asset or benefit prior to their bankruptcy. The nature of these contributions distinguishes them from contributions made under pre-existing superannuation arrangements, e.g. compulsory employer contributions.

Few indications have been provided as to how a pattern of superannuation contributions might be established or when a contribution may be regarded as ‘out of character’. The second reading speech to the Bankruptcy Legislation Amendment (Superannuation Contributions) Bill 2006 offers the example of a contribution by a bankrupt who has no history of making substantial superannuation contributions, but made such a contribution shortly before becoming bankrupt. 

How this example might fit in with the large, one-off and irregular contributions permitted under the tax legislation is anyone’s guess, e.g. the CGT exempt amount of up to $1 million, the non-concessional cap and bring-forward rule allowing up to $540,000 to be contributed in any one financial year.  Whether or not such a contribution will be seen as out of character and made available to the bankruptcy trustee ultimately depends on the court’s interpretation of the legislation.

It should be noted that out of character contributions are not automatically assumed to have been made with the intention to defeat creditors. However, out of character contributions may need to be explained to the court to prove that they were not made with the intention to defeat creditors.

The contribution caps, particularly the bring-forward rule, may assist in explaining why a large one-off contribution was made without having an intention to defeat creditors.

When contributions are void

The whole contribution is void if it’s in breach of section 128B or 128C and, in addition to enabling courts to make orders for the repayment of void contributions by superannuation fund trustees, the recovery powers exercisable by the official receiver include the power to issue notices directing fund trustees holding void contributions to forward them to the bankruptcy trustee.

The official receiver can also issue freezing orders against a superannuation fund in circumstances where there are reasonable grounds for believing that the contribution has been made with the intention of defeating creditors, either in whole or part. A freezing order may prevent the fund trustee from cashing, debiting, rolling over, transferring or forfeiting the superannuation benefit and will be revoked when, among other things, the void contribution is repaid or 180 days pass after the freezing order was issued.

A fund trustee is entitled to recover the gross amount of the contribution paid into the superannuation fund, less any fees and charges associated with the contribution or any taxes it has paid in relation to it. Where fees, charges and taxes have been debited, the bankruptcy trustee must refund any such amounts to the superannuation fund.

$1.6 million transfer balance cap

From 1 July 2017, there will be a $1.6 million cap on the total value of a superannuation interests that can be used to support an individual’s retirement income stream (i.e. that can be transferred from a concessionally taxed accumulation account into a tax-free retirement account from which the pension payments are drawn).

The cap is introduced by new Division 294 of the Income Tax Assessment Act 1997 which requires the creation of a transfer balance account and sets out a series of rules relating to credits and debits to that account.

From a bankruptcy perspective, it is important to consider the impact that void transactions may have on the transfer balance account. Where the value of the superannuation interest supporting the retirement income stream is reduced because of payments required to comply with a notice under section 139ZQ of the Bankruptcy Act, the individual is able to notify the Commissioner of Taxation and receive a debit in their transfer balance account to the value of the reduction. There is no time limit within which the commissioner needs to be notified.

Chris Ketsakidis, partner, Mills Oakley