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’.

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