Pre-bankruptcy transfers unprotected

A recent court case has demonstrated to trustees the withdrawal and transfer of superannuation benefits prior to declaring bankruptcy will not protect those assets from creditors’ claims even if they remain within the retirement savings system, according to an SMSF technical specialist.

Heffron head of education and content Lyn Formica noted this outcome had occurred in the case of Kirk as trustee of the Property of Smith (a Bankrupt) v Smith [2024] FCA 240 heard by the Federal Court recently.

The defendant withdrew amounts from his superannuation account and transferred them into a personal bank account in 2016, with the funds then contributed to his wife’s retirement savings. The husband subsequently filed for bankruptcy in 2019 after the failure of his business.

The court ruled once the husband removed the funds from his account it ceased to be a superannuation interest protected from creditors under the Bankruptcy Act and the transfer was done for the main purpose of preventing monies from becoming divisible among his creditors.

“The lesson here is the amount of money that he had inside super at the time he was declared bankrupt would not have been available to his creditors. That protection disappears if you move the money outside super before your bankruptcy is declared,” Formica told attendees of a technical webinar hosted by Heffron today.

“Additionally, the money was put into his wife’s superannuation account: was it protected for her? No, it wasn’t protected for her because the bankrupt’s main purpose in making that contribution for her was to defeat his creditors. So it fell afoul of the rules.

“So if you do have a client where there is a risk of bankruptcy, taking money out of super could be the worst possible thing you could do because if the money had stayed inside super, it would have been protected from the trustee in bankruptcy.”

She added superannuation benefits were subject to different treatment in the situation where a trustee had already declared bankruptcy and wished to make a withdrawal and transfer of funds.

“Bankrupts are essentially allowed an income threshold each year that they’re allowed to keep and then if they go over that particular income threshold, half of the excess is available to the trustee in bankruptcy and pension payments add into that income threshold,” she noted.

“The income threshold is about $70,000 per annum at the moment. It gets indexed every six months. But if [the SMSF member ends] up with income pension payments and other sources of income totalling $100,000 per annum, they’d have gone $30,000 over that threshold.

“So half of it, $15,000, would be available to the trustee in bankruptcy, whereas lump sums are not available to the trustee in bankruptcy. Those rules only apply once bankruptcy is declared.”