Superannuation and Bankruptcy

The mass of superannuation-related bills coming before Parliament this year contain yet another superannuation surprise. This one concerns the asset protection features of superannuation savings in the event of an unexpected setback in a member’s personal finances.

Legitimate asset protection involves taking precautions to reduce the vulnerability of assets to legal claims in the future. It does not involve trying to avoid existing creditors.

Some lawyers advising on asset protection of personal assets – and to our knowledge the media – appear to have not yet fully comprehended the implications for asset protection of the Superannuation Legislation Amendment Simplification Bill. The explanatory memorandum to the bill explains that references to reasonable benefit limits (RBLs) will be removed from the Bankruptcy Act to be consistent with the new super system that abolishes RBLs from July 1.

And then the memorandum drops a bombshell: “This means that from July 1, 2007, a bankrupt’s entire interest in a superannuation fund is protected from being divisible amongst creditors.” (Under existing law, this protection is capped at the pension RBL of $1,356,291 for 2006-07.)

The proposed amendment removing the cap on the protection of superannuation is taking the superannuation industry by surprise because the general expectation was that the Government would introduce a dollar-cap on the protection of, say, $1.5 million (indexed).

But superannuation provides no protection for any contributions made to avoid creditors. As well, the Government is expected to pass legislation allowing a court to consider a bankrupt’s past contribution pattern to identify contributions that are “out of character” when deciding if the main intention of making the contributions was to defraud creditors.

You might ask, what have the asset protection qualities of super to do with anyone whose finances are sound with no black clouds on the horizon? That’s the point.