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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