Category: Superannuation

Super to be recoverable by bankruptcy trustees

The Attorney-General announced revised proposals* on 27 July 2006 to amend the Bankruptcy Act 1966. Superannuation contributions made prior to bankruptcy with the intention to defeat creditors will now be recoverable by bankruptcy trustees. The proposals will apply to superannuation contributions made after 27 July 2006.

Previous proposals in 2003 and 2005 were abandoned prior to certain defeat in the Senate.

Current proposal
The Government decided in July 2006 not to proceed with earlier proposals to allow for recovery of ‘excessive’ superannuation contributions as these would have unduly complicated both the bankruptcy and superannuation systems. The July 2006 announcement is consistent with the Government’s plan to simplify and streamline superannuation.

The amendments to the Bankruptcy Act will prevent unscrupulous debtors from transferring assets into superannuation when bankruptcy is looming. However, genuine contributions to superannuation for retirement income purposes will be protected from recovery.

Proposed amendments to the Bankruptcy Act
An announcement from the Insolvency and Trustee Service Australia has stated that the amendments will:

  • allow a bankruptcy trustee to recover the value of contributions made by the bankrupt to defeat creditors, where the contributions were made to the bankrupt’s own superannuation plan and that of a third party (along the lines of the current section 121)
  • allow the trustee to recover contributions made by a person other than the bankrupt for the benefit of the bankrupt where the bankrupt’s main purpose in participating in the arrangement is to defeat creditors,
  • provide that consideration given by the superannuation trustee for the contribution will be ignored in determining whether the contribution is recoverable by the bankruptcy trustee
  • allow the Court to consider the bankrupt’s historical contributions pattern and whether any contributions were ‘out of character’ in determining whether they were made with the intention to defeat creditors,
  • provide that the superannuation fund will not have to repay any fees and charges associated with the contributions or any taxes it has paid in relation to the contributions, and
  • give the Official Receiver the power to issue a notice to the superannuation fund or funds that are holding the contributions that will put a freeze on the funds in order to prevent the bankrupt from rolling them over into another fund or otherwise dealing with them in circumstances where the trustee is entitled to recover them (the notice will be based upon the notice issued pursuant to section 139ZQ).

The effect of these amendments will be that payments to superannuation plans to defeat creditors would be recoverable in the same way as other payments or transfers to defeat creditors.

The amendments, once legislated, will apply to any contributions made after 27 July 2006.

Thanks to Colonial First State for this news based on Attorney-General, Philip Ruddock’s, Press Release 138/2006, 27 July 2006 ‘Government closes superannuation loophole in bankruptcy’.

Compulsory cashing now abolished in law

On 30 June 2006, following amendments to the SIS regulations*, the abolition of compulsory cashing of superannuation benefits was made law. This is the first 2006 Federal Budget superannuation proposal to be made law.

Originally, it was proposed to abolish compulsory cashing from 1 July 2007. A press release from the Treasurer on 13 June 2006 advised that the compulsory cashing rule would be brought forward to 10 May 2006.

Old compulsory cashing rules
Prior to the Budget announcements, a member’s superannuation benefits had to be cashed “as soon as practicable” after the occurrence of any of the following events:
1. the member attained age 65 but not age 75 and was not gainfully employed for at least 240 hours in the previous financial year; or
2. the member reached age 75 on 30 June 2004 and was not gainfully employed for at least 30 hours per week; or
3. the member reached age 75 on or after 1 July 2004; or
4. the member’s death.

New compulsory cashing rules
Compulsory cashing still applies if the member dies. The amendments only apply to cashing events 1, 2 and 3 above.

The amendments confirm that:

1. During the period 10 May 2006 to 30 June 2007 a member’s benefits in a regulated superannuation fund are not required to be cashed.
2. During the period 10 May 2006 to 30 June 2006 if a trustee cashed a member’s benefits under the old cashing rules, it is not a breach of the new compulsory cashing rules.

The wording of the amendments does not cover the period after 30 June 2007. It is assumed that the regulations will be amended in full prior to 30 June 2007 to address the ongoing abolition of compulsory cashing.

What new in the 2006 tax return – Part 2

Superannuation contributions splitting

If a person makes a personal contribution to their own super fund and splits part of that contribution to their spouse’s super account, it is important to remember they cannot claim the superannuation spouse contributions tax offset for this contribution.

However, if they make a contribution directly to their spouse’s account they may be able to claim a tax offset, provided the spouse’s assessable annual income plus reportable fringe benefits is less than $13,800.

Capital gains tax and property

Changes have been made so that certain costs relating to property which were not previously included in the cost base and the reduced cost base must now be included.

These include:

* certain incidental costs of buying and selling property,
* costs of owning property in addition to non-capital costs like interest and maintenance, and
* costs of preserving the value of property and not just to increase its value.

These changes only affect property disposed of on or after 1 July 2005, however relevant costs incurred before that date must be included in the cost base and reduced cost base.

Capital returns

In the 2005-06 tax year, more than 850,000 individuals and self managed superannuation funds have received capital returns on listed company shares.

As a result of these capital returns, these shareholders will have to adjust the cost base of their shares and some may make capital gains which must be declared in their 2006 tax return.

The Tax Office will have a number of publications on its website from 1 July 2006 which provide advice on the tax consequences and/or treatment of capital returns from listed shares and share buy-backs including:

* Guide to Capital Gains Tax (which can also be ordered by phoning 1300 720 092)
* Non-assessable payments, and
* Key events for Australian shareholders.

There is also a range of detailed fact sheets on the website on the tax consequences of capital returns relating to specific companies including:

* Aristocrat
* CSR, and
* AMP.

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Share buybacks

During the 2005-06 tax year, listed companies in Australia have also bought back more than 150 million shares worth in excess of $3.5 billion.

Shareholders who have participated in these buy-backs need to calculate any capital gain or loss for inclusion in their 2006 tax return. Dividends paid as part of the buy-back must also be declared in their return.

Publications on the Tax Office website from 1 July 2006 which provide advice on the tax consequences of share buy-backs include:

* Guide to Capital Gains Tax (which can also be ordered by phoning 1300 720 092)
* Share buybacks, and
* Key events for Australian shareholders.

There are also a range of detailed fact sheets on the website on the tax consequences of share buy-backs by specific companies including:

* BHP Billiton
* St George, and
* Westpac.