Go bankrupt lose Super?
Bankrupt lose Super. But isn't Superannuation protected from bankrupcty? The 3 common safe havens to protect assets from insolvency are:
- ‘Clean skin’ Family Trusts (eg, doesn't employ people)
- Low-risk spouse (eg. spouse is a school teacher)
With huge wealth moving into Super the Trustee-in-Bankruptcy has its eye on Super. The case of Morris v Morris shows how desperate the Trustee-in-Bankruptcy has become - such underhand tactics puts greater risks on the accountant and financial planner.
What are the ground rules for bankrupt lose Super?
- The Trustee-in-Bankruptcy usually can’t touch your Superannuation assets: s116 Bankruptcy Act 1996
- After bankruptcy, he still can’t touch your Super received as a lump sum: s116
- The Trustee-in-Bankruptcy takes your Super where:
3.1 you transferred assets into Super to defeat creditors; and
3.2 you, as a bankrupt, get pension payments from Super: s 139L Bankruptcy Act 1996.
- The Super is not protected from taxation debts via a garnishee notice: s 260-5, Sch 1, Tax Admin Act 1953; Denlay v FCT  FCA 307 & para 118 PS LA 2011/18.
- The Family Court can rip into your Superannuation if your spouse, mistress and gay partner separate from you. (Bigamy is legal, as you can, under State law, be 'married' to your spouse, defacto and gay partner, all at the same time.)
What happens when a bankrupt gets your superannuation? Bankrupt lose Super
Morris v Morris (Bankrupt)  FCA 846
Bankrupt lose Super. Is it always true? If you go bankrupt and then get your Superannuation payout as a lump sum it is protected from creditors. But what happens if you go bankrupt and get someone else’s superannuation? Does the protection from creditors extend this far?
Mrs Morris was bankrupt. She then received $110k from her dead husband’s super fund. Her trustee-in-bankruptcy said, ‘hand it over Mrs Morris’. She said no. It went to Court.
The Court held that when you die the Super that you give to a bankrupt is protected.
What about life insurance and anti-detriments?
Mrs Morris also separately received $312k by way of a life insurance and related anti-detriment adjustment payment. This was automatically protected and not in contention. See the Sir Thomas Clyne report, which led to the enactment of the Bankruptcy Act. In that report, at para 156, as Burchett J noted, it was stated:
It has been for many years the policy of Parliaments throughout Australia to give protection to policies of life insurance against the claims of creditors.
Fire-proof your client's Superannuation after the Morris Case
There are 5 ways to protect Super at death:
- Build an SMSF Deed that contains insolvency protection. See Sample here. Or update your SMSF Deed.
- if you have a 3-Generation Testamentary Trust in your Will then:
- the 'at risk of bankruptcy child' gets the Superannuation (which is protected for them)
- while the other child gets other assets in the Will
- Put a Superannuation Testamentary Trust in your Will so your protection is carried forward to your beneficiaries – even if a beneficiary is bankrupt the super is protected in their hands.
- Put a Bankruptcy Trust in your Will - so that the Trustee-in-Bankruptcy can't touch any of your assets - including Superannuation.
- Reconsider Reversionary Pensions. If the person getting the pension is at risk of bankruptcy, then don't set up a Reversionary Pension. If Mrs Morris had received, instead of a lump sum, a reversionary pension, then it would have been lost to her because she was bankrupt.
Morris (Bankrupt) v Morris (Bankrupt)  FCA 846
Di Cioccio v Official Trustee in Bankruptcy (2015) 229 FCR 1
Lin, Re; Law v Lin (1960) 18 ABC 142
NM Superannuation Pty Ltd v Young (1993) 41 FCR 182
Sainsbury v Inland Revenue Commissioners  Ch 712
Bankruptcy Act 1966 (Cth) ss 58, 58(1), 116
Superannuation Industry (Supervision) Act 1993 (Cth)