How secure is your superannuation?

Superannuation plays a critical role in a robust asset protection strategy – but it is not an impenetrable wall. By understanding the weaknesses, appropriate planning can be put in place to provide and strengthen the asset protection merits of super, as Matthew McKee reports.

Section 116 of the Bankruptcy Act 1966 (Cth) is the reason why many see super as the be all and end all of asset protection.

In simple terms, that section provides that a person’s interest in a super fund is not property that is available to creditors if that person is made bankrupt, except where it is transferred into the fund in circumstances where it can be inferred that it was done with the intention of defeating creditors: see Bankruptcy Act 1966 (Cth) sections 128B and 128C.

Yet, super is not an impenetrable wall.

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A notice issued by the Commissioner of Taxation pursuant to section 260-5 of Schedule 1 to the Taxation Administration Act (TAA) 1953 (Cth) (commonly referred to as a “Garnishee Notice”) is an increasingly used debt recovery method capable, in certain circumstances, of piercing super to recover a member’s taxation debts. 

A Garnishee Notice can be issued by the Commissioner where any person or entity “owes” money (which is defined to include money held on behalf of the taxpayer even where such amount is not yet due and payable) to the relevant taxpayer, and this includes the trustee of a super fund in relation to member benefits.

The effect of a Garnishee Notice is that the recipient is legally obliged to pay the amount specified in the Garnishee Notice to the Commissioner.

The failure to do so is a criminal offence and the recipient of the Notice may be held personally liable to the Commissioner for the full amount claimed. 

According to the Commissioner, the following circumstances are relevant to considering whether a Garnishee Notice should be issued in relation to super assets:

1. The financial position of the taxpayer and whether the taxpayer has significant other debts such that the Commissioner may have difficulty in recovering the tax liabilities through ordinary debt recovery methods;
2. Whether the taxpayer has engaged in conduct that leads the Commissioner to form the view that they are a high-risk taxpayer; and
3. Whether the issue of the Garnishee Notice is unlikely to cause hardship to the taxpayer in providing for his or her family or in the conduct of a business.

The Commissioner’s current practice is that a Garnishee Notice will not be effective against a super fund until the taxpayer/member’s benefits are payable under the rules of the fund, that is, until a condition of release has been satisfied.

This appears to be a very generous interpretation by the Commissioner.

It is arguable that sub-section 260-5(3) of Schedule 1 to the TAA means that the Commissioner would be entitled, pursuant to a Garnishee Notice issued to a trustee of a superannuation fund, to receive money held in the super fund even where the member has not satisfied a condition of release.

This is because this section operates as a deeming provision so that certain amounts held on behalf of a taxpayer, but not owing in a strict legal sense because a condition needs to be satisfied, are regarded as owing for Garnishee Notices.

It is possible that the Commissioner will adopt a less generous interpretation in the future.

What should a trustee do?

What should a trustee do if they receive a Garnishee Notice from the Commissioner?

The Trustee should first advise the members of the fund that it has received the Garnishee Notice.

On a practical level, a trustee of a multi-member fund may be less likely to advise its members of the receipt of such a notice.

This practicality may provide a further advantage for the use of a self-managed super fund to hold one’s super assets as opposed to a multi-member retail fund.

The Trustee then needs to consider its competing obligations arising out of the receipt of the Garnishee Notice: the obligation to comply with the Garnishee Notice where lawfully compelled, and the obligation to preserve the assets of the super fund.

In practical terms, this requires a trustee to satisfy itself that (a) the Garnishee Notice has been validly issued and (b) that the assets held by the super fund are of the type that can be subject to a Garnishee Notice by the Commissioner.

Validity of Garnishee Notice

A recipient of a purported Garnishee Notice is not under any obligation to comply with an invalid notice.

However, a Trustee needs to be sufficiently satisfied that the Garnishee Notice is invalid given the ramifications of non-compliance.

To confirm that a Garnishee Notice has been validly issued, a Trustee should at the very least:

1. Confirm that the tax liability was due and payable prior to the service of the Garnishee Notice. Where the Garnishee Notice is served before the Notice of Assessment is served, even if by one day, then the Garnishee Notice is invalid.
2. Confirm that the amount stipulated in the Garnishee Notice is sufficiently certain. 
3. Confirm that the Garnishee Notice has not been issued in bad faith or for an improper purpose.

There is a range of reasons as to why a Garnishee Notice may be invalidly issued. A prudent trustee should seek immediate advice, upon receipt of a Garnishee Notice, to confirm its validity.

Funds properly subject to a Garnishee Notice

A Garnishee Notice is a creature of statute which means that it is only effective in accordance with the terms of its statutory force. The implications of this are as follows:

1. A Garnishee Notice is only effective against ‘money’ within the meaning of that term in of section 260-5 of Schedule 1 to the TDA. This does not include foreign currency. Accordingly, a Garnishee Notice is ineffective against a foreign currency bank account.
2. A Garnishee Notice in only effective if the relevant taxpayer is the only person with a legal entitlement to the money. Accordingly, a Garnishee Notice is ineffective against a joint bank account. 
3. Further, where money is subject to underlying interest – such as a solicitor’s lien – the Garnishee Notice cannot defeat, and is subject, to that interest.

As can be seen, there are number of reasons why a valid Garnishee Notice may be ineffective in any particular circumstance, even where the Notice has otherwise been validly issued.

A Trustee of a super fund, in the proper exercise of its duties, should therefore satisfy itself that the funds it holds respond to the Garnishee Notice prior to making any payments to the Commissioner. 

The Bankruptcy Act confers considerable protection on assets held in a super fund.

However, that protection is neither all encompassing nor impregnable – it is wrong to believe that a person’s super cannot be touched creditors.

Any Trustee seeking to properly exercise his or her duties will need to understand these limitations so an assessment can be made as to whether there is a lawful obligation to comply with the Garnishee Notice.

However, it is not only when a Garnishee Notice is received by a Trustee that the relevance of these matters arises.

Consideration of the powers and limitations of Garnishee Notices when forward planning is just as important.

Proper planning and appropriate structuring of super, including consideration of these issues when drafting the terms of the trust deed, can ensure that the vulnerabilities of super against Garnishee Notices are minimised.

If these matters are left until a Garnishee Notice is received, it is often too late to put in place the necessary protections. 

So what? An understanding of the limitations to the protection conferred on assets held in a super fund is useful when things go bad.

However, the greater value is in understanding such limitations when implementing a super strategy and taking appropriate steps at that time.

Matthew McKee is a solicitor at Argyle Lawyers.