Bankruptcy and Superannuation: Clawback Rules

Is Super Protected in Bankruptcy

Super held in a regulated superannuation fund is generally excluded from the property divided among creditors under section 116(2)(d) of the Bankruptcy Act 1966. The provision also protects interests in approved deposit funds and exempt public sector superannuation schemes. It covers retirement savings accounts separately.

Section 116(2)(d) imposes no dollar ceiling on the protected super balance. The pension transfer balance cap is a separate tax rule, not a bankruptcy protection limit. The protection is expressly subject to contribution recovery provisions, including sections 128B and 128C. The Bankruptcy Act sets out those exceptions.

The Australian Financial Security Authority’s property guidance distinguishes the fund interest from money withdrawn before bankruptcy. A pre-bankruptcy withdrawal remaining in a bank account when bankruptcy starts can vest in the trustee. Property bought with that withdrawal can also be available to creditors.

A non-pension lump sum from a protected fund received on or after bankruptcy is generally protected. Property bought wholly or substantially wholly with that protected money can retain protection under section 116(3). Mixed funding needs separate analysis under section 116(4). Preserve the transfer trail from the fund to the bank account and any later purchase.

A pension or other super income stream can enter the bankruptcy income-contribution assessment. Protection of the fund balance therefore does not remove every income obligation. AFSA explains this distinction in its guidance on money and superannuation.

When Contributions Can Be Clawed Back

Sections 128B and 128C allow recovery of qualifying super contributions made to keep property from creditors or hinder or delay its division. A large contribution alone does not establish the statutory test.

Section 128B deals with a contribution by the person who later becomes bankrupt. The transferred property must probably have been part of that person’s estate, or available to creditors, without the contribution. The person’s main purpose must have been to prevent division among creditors or hinder or delay that process.

Section 128C deals with a contribution by someone else for the future bankrupt’s benefit. It requires a scheme in which the future bankrupt participates. The property must probably have been available to their estate or creditors without the transfer. The relevant main purpose is the future bankrupt’s purpose in entering the scheme, not merely the contributor’s intention.

For example, directing money otherwise payable to a debtor into their super can require examination under section 128C. An ordinary contribution from someone else’s money does not automatically meet its conditions. Identify what the debtor would otherwise have received and the arrangement that redirected it.

Both provisions have statutory commencement limits. For older transactions, apply the contribution-specific boundary in the legislation before assessing recovery.

The court must consider the established contribution pattern and whether the challenged contribution is out of character. For section 128B, compare the debtor’s earlier contributions. Section 128C requires comparison with the third party’s earlier contributions for that beneficiary, before the scheme began.

Purpose can be established through other evidence too. The Act deems the required purpose where the circumstances reasonably support an inference of insolvency or impending insolvency at the relevant time. Missing usual and proper business records, or failure to preserve them, can create a rebuttable presumption of that insolvency.

The explanatory memorandum explains that an out-of-character contribution does not automatically prove an intention to defeat creditors. The trustee must assemble the contribution history alongside evidence of financial position and the explanation for the payment. Other asset transfers have their own rules under section 121 of the Bankruptcy Act.

Proving the Contribution Pattern

Bank statements show whether a super contribution departs from the debtor’s usual behaviour and where its money came from. Fund contribution records establish what the fund received and how it allocated the payment. Read both sides of the transfer together.

Build a schedule that records each contribution’s amount and payer, with the source account and fund receipt. Include earlier contributions over a period that shows the person’s normal pattern. Separate employer contributions from voluntary payments and record any salary-sacrifice arrangement. Compare the amounts with income, asset-sale proceeds and funds moving through related accounts.

In a hypothetical matter, a debtor pays $500 each month into super for three years, then contributes $120,000 after receiving a judgment demand. The change in size and timing warrants investigation. The statements might show that the $120,000 came from an asset sale, but that fact alone does not prove the main purpose.

Compare that payment with the judgment correspondence and debts due at the time. Examine the debtor’s ability to pay those debts and any documented retirement or contribution plan. A pre-existing plan provides a different explanation from a plan first created after enforcement begins. The court assesses the evidence against the statutory conditions.

FinTrace saves trustees and forensic accountants hours of statement review by consolidating supplied PDFs into a searchable Excel ledger and a clear findings report. Suspicious transfers are flagged, and each finding cites its source PDF filename and page. That gives the professional the payment history and supporting evidence together when examining an unusual contribution.

Keep gaps in the supplied records visible and distinguish a confirmed fund receipt from a bank description that only suggests a super payment. The trustee’s investigation powers explain how further records can be obtained.

SMSF Issues

A bankrupt can retain a protected interest in a regulated self-managed super fund (SMSF), but must cease acting as its trustee. Bankruptcy also prevents the person from continuing as a director of the fund’s corporate trustee.

Under section 120 of the Superannuation Industry (Supervision) Act 1993, an insolvent under administration is a disqualified person. Section 126K prohibits a disqualified person from acting in the relevant trustee or corporate-trustee role. The Australian Taxation Office’s SMSF guidance requires immediate cessation and written notification of disqualification.

Notify the ATO of changes to the fund’s details within 28 days. A six-month period to restore the fund’s SMSF structure can apply after trustee changes. It is not permission for the bankrupt to keep acting during that period.

The remaining trustees must address the fund structure and the bankrupt member’s benefits. Depending on the circumstances, this can involve rolling benefits to another complying fund or appointing an approved professional trustee. Winding up the fund is another option. Keep trustee minutes and rollover records so the change can be followed without losing the contribution history.

An SMSF’s assets belong to the fund, so bankruptcy does not make every fund asset the member’s personal property. Assess the member’s interest, challenged contributions and trustee eligibility separately. Where separation proceedings also affect the fund, SMSF divorce issues require their own analysis. For the bankruptcy investigation, preserve both the fund records and the personal account trail before restructuring changes who holds them.