What happens to superannuation in the event of bankruptcy?

What happens to superannuation in the event of bankruptcy?

There’s no doubt that declaring bankruptcy is a challenging event; however, the good news is that your superannuation funds could be off-limits to creditors. You might be able to use these funds for various expenses, like asset purchases. 

According to the Bankruptcy Act, if a person declares bankruptcy, the person’s regulated super fund is protected and unavailable to creditors for recovery. This is because when a person goes bankrupt, creditors can sell any assets for recovery that are considered as divisible property. But, as superannuation is usually not regarded as divisible property, it’s not available to the creditors. 

When can creditors access superannuation? 

As the funds in your superannuation fund are not considered divisible property, some Aussies may be tempted to contribute their divisible funds into their superannuation to protect it from creditors.

However, in such cases, the protection of your superannuation can be voided by your creditors, and they can access your super funds for recovery. Here are some situations under which creditors can access your superannuation: 

  • A large contribution was made to your super before bankruptcy.
  • The fund contributed to your super would have otherwise been a part of the bankrupt estate and would be available to creditors.
  • The intent of the contribution was to make the property or fund unavailable to creditors or to delay the process of recovery. 

If you’ve accessed your superannuation funds before bankruptcy and the funds are still in your bank account at the time of bankruptcy, the funds will be considered divisible property and will be available to creditors. This includes any funds taken as a lump sum, and even as a pension. 

Can you access your superannuation funds after declaring bankruptcy?

After declaring bankruptcy, you can withdraw money from your superannuation funds, which you can usually spend as you wish provided you meet the superannuation regulations. If you withdraw the amount as a lump sum, the funds may not be considered a divisible property and may be protected from creditors.

Any assets you purchase using these funds, for example, a house, may be protected from creditors if a major portion of the acquisition cost comes from the super funds. Again, these rules only apply if you have a regulated fund.  

However, if you access the funds in part-payments, for example as a pension, the funds received are considered income for the purposes of income assessments in bankruptcy. So, if you receive an amount that exceeds the relevant threshold for income assessment purposes, you will have to pay 50 per cent of all the after-tax income you’ve received to your creditors. 

What happens to a Self-Managed Super Fund (SMSF) after bankruptcy?

You should be aware that the Superannuation Industry Supervision Act 1993 states that a ‘disqualified person’ cannot be a trustee of a superannuation entity. The term ‘disqualified person’ is used for people who are insolvent under administration, for example, a bankrupt. So, if you declare bankruptcy, you can no longer be a trustee of any trust, including your Self-Managed Super Fund (SMSF). 

If you are a trustee of an SMSF, you must retire or resign as the trustee before declaring bankruptcy or within six months after you declared bankruptcy. Violating this rule could potentially lead to imprisonment. 

After you have retired from your position, you could transfer all your superannuation interests to a regulated superannuation fund and then terminate your SMSF. An alternative is to appoint a Registrable Superannuation Entity (RSE) licensee to act as a trustee to your SMSF.

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Learn more about superannuation

How many superannuation funds are there?

There are more than 200 different superannuation funds.

What is a superannuation fund?

A superannuation fund is an institution that is legally allowed to hold and invest your superannuation. There are more than 200 different superannuation funds in Australia. They come in five different types:

  • Retail funds
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Self-managed super funds

Retail funds are usually run by banks or investment companies.

Industry funds were originally designed for workers from a particular industry, but are now open to anyone.

Public sector funds were originally designed for people working for federal or state government departments. Most are still reserved for government employees.

Corporate funds are arranged by employers for their employees.

Self-managed super funds are private superannuation funds that allow people to directly invest their money.

How long after divorce can you claim superannuation?

You or your partner could be forced to surrender part of your superannuation if you divorce, just like with other assets.

You can file a claim for division of property – including superannuation – as soon as you divorce. However, the claim has to be filed within one year of the divorce.

Your superannuation could be affected even if you’re in a de facto relationship – that is, living together as a couple without being officially married.

In that case, the claim has to be filed within two years of the date of separation.

Either way, the first thing to consider is whether you’re a member of a standard, APRA-regulated superannuation fund or if you’re a member of a self-managed superannuation fund (SMSF), because different rules apply.

Standard superannuation funds

If your relationship breaks down, your superannuation savings might be divided by court order or by agreement.

The rules of the superannuation fund will dictate whether this transfer happens immediately, or in the future when the person who has to make the transfer is allowed to access the rest of their superannuation (i.e. at or near retirement).

Click here for more information.

SMSFs

If your relationship breaks down, you must continue to observe the trust deed of your SMSF.

So if you and your partner are both members of the same SMSF, neither party is allowed to use the fund to inflict ‘punishment’ – such as by excluding the other party from the decision-making process or refusing their request to roll their money into another superannuation fund.

This no-punishment rule applies even if the two parties are involved in legal proceedings.

Click here for more information.

Financial consequences

Superannuation funds often charge a fee for splitting accounts after a relationship breakdown.

Splitting superannuation can also impact the size of your total super balance and how your super is taxed.

Click here for more information.

How do I combine several superannuation accounts into one account?

The process used to consolidate several superannuation accounts into one is the same process used to change superannuation funds. This can be done through your MyGov account or by filling out a rollover form and sending it to your chosen fund.

What superannuation details do I give to my employer?

When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You should also provide your tax file number – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

Can I choose a superannuation fund or does my employer choose one for me?

Most people can choose their own superannuation fund. However, you might not have this option if you are a member of certain defined benefit funds or covered by certain industrial agreements. If you don’t choose a superannuation fund, your employer will choose one for you.

How do you find lost superannuation funds?

Lost superannuation refers to savings in an account that you’ve forgotten about. This can happen if you’ve opened several different accounts over the years while moving from job to job.

You can use your MyGov account to see details of all your superannuation accounts, including any you might have forgotten. Alternatively, you can fill in a ‘Searching for lost super’ form and send it to the Australian Taxation Office, which will then search on your behalf.

What age can I withdraw my superannuation?

You can withdraw your superannuation (or at least some of it) when you reach ‘preservation age’. The preservation age is based on date of birth. Here are the six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

When you reach preservation age, you can withdraw all your superannuation if you’re retired. If you’re still working, you can begin a ‘transition to retirement’, which allows you to withdraw 10 per cent of their superannuation each financial year.

You can also withdraw all your superannuation once you reach 65 years.

How do you create a superannuation account?

Before you create a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

When did superannuation start?

Australia’s modern superannuation system – in which employers make compulsory contributions to their employees – started in 1992. However, before that, there were various restricted superannuation schemes applying to certain employees in certain industries. The very first superannuation scheme was introduced in the 19th century.

How is superannuation regulated?

The Australian Prudential Regulation Authority (APRA) regulates ordinary superannuation accounts. Self-managed superannuation funds (SMSFs) are regulated by the Australian Taxation Office.

What are concessional contributions?

Concessional contributions are pre-tax payments into your superannuation account. The payments made by your employer are concessional payments. You can also make concessional contributions with a salary sacrifice.

How do you set up superannuation?

Before you set up a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

How do you claim superannuation?

There are three different ways you can claim your superannuation:

  • Lump sum
  • Account-based pension
  • Part lump sum and part account-based pension

Two rules apply if you choose to receive an account-based pension, or income stream:

  • You must receive payments at least once per year
  • You must withdraw a minimum amount per year
    • Age 55-64 = 4%
    • Age 65-74 = 5%
    • Age 75-79 = 6%
    • Age 80-84 = 7%
    • Age 85-89 = 9%
    • Age 90-94 = 11%
    • Age 95+ = 14%

If you want to work out how long your account-based pension might last, click here to access ASIC’s account-based pension calculator.