The Bankruptcy Act 1966 (Cth) was amended to address the outcome of the High Court's decision in Cook v Benson1. It was held in that case that a trustee in bankruptcy could not recover amounts transferred from a retirement fund to another superannuation fund after the bankruptcy of the member as the amounts rolled over to the fund by or on behalf of the member were made in good faith and for consideration (ie the member had a right to receive benefits on retirement).
As a result of the changes to the Bankruptcy Act, a trustee in bankruptcy can now claw-back any contribution made on or after 28 July 2006 with the intention to defeat creditors irrespective of whether the contribution was for valuable consideration.
Proving intention to defeat creditors
A court will consider historical patterns of contributions and whether a contribution is 'out of character' in determining whether a contribution has been made with the 'intention to defeat creditors'. There is also a deeming provision which establishes a rebuttable presumption that a contribution was made to defeat creditors if it occurs at a time when it could be inferred from the person's circumstances that he or she was, or was about to become, insolvent. Therefore, the trustee in bankruptcy will be looking for a sharp rise in contributions, or a large one-off contribution to superannuation, in the months leading up to the bankruptcy.
Generally, superannuation benefits are quarantined from creditors. However, the trustee in bankruptcy is able to deal with any income of the bankrupt, which includes income from an annuity or pension that, when combined with the bankrupt's other income, is above the base income threshold amount (currently $41,250.30). However, as income does not include a lump sum benefit, a bankrupt may receive lump sums (subject to satisfying a condition of release) without those payments being available to creditors.
The timing of any lump sum paid from super to a person with solvency issues is crucial. If a person takes a lump sum prior to being declared bankrupt, the payment will be available to creditors. However, once the person has been declared bankrupt, a lump sum payment (including an in-specie distribution) is likely to be quarantined from creditors.
Padma (age 60) runs a catering company that has not made a profit for the last two years. Padma has not been paying herself a wage and without any income has defaulted on her mortgage. Padma has decided to wind up the business and retire, and has been advised that she should consider filing for bankruptcy.
Padma is the sole member of a self-managed superannuation fund with a corporate trustee. In the past, Padma made regular contributions of $25,000 each quarter, and also made a $1 million non-concessional contribution before 1 July 2007. The company has also been making employer contributions on her behalf. Padma holds listed shares that she bought for $20,000 that are now worth $100,000. Padma hadn't contributed the shares to super because she didn't want to crystallise the capital gain, but now decides to do so before she files for bankruptcy. The fund also holds shares in an unlisted private company originally worth $10,000 that have been valued at $150,000.
The majority of the contributions are unlikely to be clawed back by the trustee in bankruptcy as they either form part of a regular pattern of contributions or were made in response to an impending change in the law (ie the $1 million contribution).
However, the transfer of the shares into the fund is likely to be attacked by the trustee in bankruptcy as having been made with the intention to defeat creditors as it is 'out of character', and the timing (just before filing for bankruptcy) means there is a presumption the transaction was entered into to defeat creditors.
Padma cannot maintain her self-managed superannuation fund as a person who is bankrupt or who has entered into an arrangement with creditors under the Bankruptcy Act is disqualified from acting as a trustee or director of a corporate trustee of a superannuation fund under the Superannuation Industry (Supervision) Act 1993. Padma can either turn the fund into a small Australian Prudential Regulation Authority (APRA) fund, or roll her benefits into a public offer fund and wind up her self-managed superannuation fund.
If Padma doesn't want to sell or redeem the unlisted shares (which are unlikely to be able to be rolled into a public offer fund), she could elect to receive the shares as an in-specie lump sum provided this is permitted under the fund deed. The in-specie distribution of the shares will be quarantined from creditors if the shares are distributed after the trustee in bankruptcy is appointed.
Dealing with the trustee
If a bankrupt receives correspondence from a trustee in bankruptcy seeking to void a contribution, the bankrupt should not transfer ownership of the relevant property to the trustee in bankruptcy until a formal notice of recovery and court order is served on the fund trustee. The Australian Taxation Office has confirmed that, in the absence of a court order being issued and served on the fund trustee, transferring an asset to the trustee in bankruptcy will be treated as a member withdrawal. This could result in the member being taxed as though they had received the benefit and the fund trustee could breach superannuation law if no condition of release has been satisfied.