Does anyone deliberately bankrupt themselves? And, having decided to bankrupt themselves, do they set about “hiding” their assets in a superannuation fund?
The answer is no. However, it is arguable that while no one deliberately sets out to become bankrupt some people, upon realising they are facing financial difficulties, might seek to use superannuation as a device to protect their remaining wealth from the demands of creditors.
It is this fact that has prompted the Commonwealth Government to release a consultation paper dealing with the effect of bankruptcy on superannuation, the bottom line of which is a series of recommendations that have the potential to create some new challenges for superannuation fund trustees.
The paper proposes changes to the Bankruptcy Act 1966 to prevent bankrupts from using superannuation to avoid creditors. 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.
However, it is worth noting that Government co-contributions, eligible termination payments and employer contributions to defined benefits funds with more than four members will be exempt from the proposed changes.
On page 18 of the October, 2005 issue of Super Review, leading law firm Minter Ellison takes issue with key elements of the discussion paper, arguing that “the proposals in the consultation paper are not justified by any evidence that superannuation is being used to avoid creditors”.
It said this was hardly surprising in the circumstances given the severe tax penalties and bankruptcy consequences if benefits exceed the retirement benefits limit.
“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,” Minter Ellison’s analysis said.
The points made in the Minter Ellison analysis are sound, and it needs to be remembered that the Government’s discussion paper has, in fact, evolved out of the Commonwealth’s perceived loss of a case in the High Court in 2003.
That case, Cook v Benson, held that “certain contributions paid into superannuation were beyond the reach of a bankruptcy trustee”. However, what needs to be made clear with respect to the Cook v Benson case is that it did not, so far as can be determined, involve any unusual activity by the bankrupt, just a rollover of benefits received from another fund.
In other words, the Federal Government is proposing to make life a lot more difficult for superannuation fund trustees for what seems to be a suspicion that, at some point in the future, bankrupts may seek to use superannuation as a means of protecting their assets.
What is troubling about the Government’s discussion paper is that it seems to assume premeditated malice on the part of bankrupts. It seems to suggest that the moment their personal affairs or the affairs of their businesses start going bad they will resort to superannuation as a safe haven for their funds.
For the most part this is nonsense, and it is just as well the discussion paper suggests that superannuation contributions made more than two years before the commencement of the bankruptcy will be exempt where it can be shown that the bankrupt was solvent when the contributions were made.
Assuming the bankrupt was running a company, the bankruptcy discussion paper would also seem to be going too far. After all, it is already a breach of the Corporations Act to knowingly trade while insolvent — a crime that carries with it some very substantial penalties.
But for superannuation fund trustees, the devil in the Government’s proposals lies in the detail, particularly with respect to the almost conflicting roles of super trustees and trustees in bankruptcy, and the degree to which super trustees will have to prove their case.
While it is understandable that the Government wants to close off a perceived loophole in the Bankruptcy Act, its efforts appear clumsy and ham-fisted. It is to be hoped that they are subjected to substantial amendment before the legislative draughtsmen set to work in earnest.
