How does bankruptcy affect superannuation contributions? On September 6, 2005, the Australian Attorney General’s Department released a consultation paper on the effect of bankruptcy on superannuation contributions made before bankruptcy. The paper proposes changes to the Bankruptcy Act 1966 to prevent bankrupts from using superannuation to avoid creditors. Comments on the paper are sought by November 4, 2005.
The proposed measures will allow bankruptcy trustees to recover both ‘excessive’ superannuation contributions and contributions to superannuation funds where the transfer was made with the intention of defeating creditors.
The proposals are summarised below, with our initial comments and questions in italics.
Response to High Court decision
The consultation paper was prepared in response to the decision of the High Court of Australia in Cook v Benson (Cook v Benson (2003) 198 ALR 218), where it was held that certain contributions paid into superannuation were beyond the reach of a bankruptcy trustee. It is interesting that this case did not seem to involve any unusual activity by the bankrupt, just a rollover of benefits received from another fund.
Comment: The proposals in the consultation paper are not justified by any evidence that superannuation is being used to avoid creditors — which is not surprising given the severe tax penalties and bankruptcy consequences if benefits exceed the retirement benefits limit (RBL). Consequently, it is hard to understand why the current simple exemption for superannuation should be replaced with a much more limited exemption that will increase administrative costs for superannuation trustees and therefore reduce member benefits.
‘Excessive’ contributions
A bankruptcy trustee will be able to recover ‘excessive’ superannuation contributions made up to five years before the date of bankruptcy. Excessive contributions are amounts above an annual threshold amount of 9 per cent of the annual superannuation guarantee maximum contribution base in each year. The threshold for 2005-06 is A$12,139.20, being 9 per cent of the superannuation guarantee maximum contribution base of A$134,880.
Comment:
The following amounts would not be recoverable as excessive contributions:
* eligible termination payment rollover amounts
* government co-contributions
* employer contributions to a defined benefit fund with more than four members
* contributions made more than two years before the date of bankruptcy where the bankrupt was solvent when the contributions were made (solvency test), although the onus is likely to be on the person who received the benefit to prove the bankrupt was solvent.
Comment:
Excessive contributions will include contributions made by the bankrupt for the benefit of a third party (for example, employees, spouse or family members) up to five years before the date of bankruptcy, minus the market value of any consideration paid by the third party to the bankrupt. Third parties will not have the benefit of the ‘excessive contributions’ threshold, but will have the benefit of the solvency test.
For employees, the amounts for which market value consideration had been provided will include contributions made under the superannuation guarantee arrangements or under a salary sacrifice arrangement.
Comment:
A bankruptcy trustee will not be able to recover contributions from a superannuation interest that has been established for a spouse under the superannuation splitting arrangements.
Comment:
Contributions made with an intention to defeat creditors
Comment:Earnings
For both excessive contributions and those made with an intention to defeat creditors, a bankruptcy trustee will be able to recover earnings on the contributions recovered. Earnings will be calculated from the date of the contribution at the long-term bond rate.
However, the recoverable amount cannot exceed the withdrawal benefit, which should address concerns regarding negative returns.
A court will be able to declare a different earnings amount (including a negative amount) where actual fund earnings differ from the long-term bond rate.
Comment:
Recovering superannuation contributions
The official receiver will be able to give a cashing notice to a superannuation trustee requiring it to pay a recoverable amount to a bankruptcy trustee. The official receiver will also provide a copy of the notice to the bankruptcy trustee, the bankrupt and the member (if they are not the bankrupt).
Comment: .
If need be, the bankruptcy trustee can seek a court order requiring the superannuation trustee to comply with the cashing notice. The court would also be able to, amongst other things, set aside or amend the cashing notice.
Comment:
A bankruptcy trustee will also be able to recover from any fund that has received a rollover amount. To avoid the difficulties of tracing precise amounts, the amount able to be recovered is not limited to the amount transferred into the fund.
The official receiver will be able to give a supervision notice for a superannuation interest. The notice will prevent a superannuation trustee from dealing with benefits that are the subject of the notice or undertaking certain transactions that could frustrate the recovery of contributions — for example, by dividing a recoverable superannuation contribution among several plans. The notice would last for 12 months but can be renewed. The official receiver must have reasonable grounds for believing a cashing notice may be given. Death will not affect recovery by the bankruptcy trustee from unpaid benefits.
Pensions
If a bankrupt invests in a commutable pension using recoverable contributions (including for a third party) before being discharged from bankruptcy, commutations will be recoverable by a bankruptcy trustee, and will reduce the amount recoverable from the superannuation trustee.
Investing a superannuation benefit into a non-commutable pension will not affect the amount that may be recovered from the superannuation trustee.
Comment:
A superannuation benefit which is not invested in a pension will be recoverable by a bankruptcy trustee.
Protection of superannuation trustees
Civil proceedings will not lie against a superannuation trustee for anything done (or not done) in good faith in reliance on, or in connection with, a cashing or supervision notice.
Comment:
Richard Batten is aPartner with Law Firm Minter Ellison
