Out of reach - Early access COVID-19 super and bankruptcy 

July 27, 2020

As we know, individuals that have had their employment and income impacted by COVID-19 have been allowed, subject to certain criteria, to access two amounts of $10,000 from their superannuation fund – the first tranche in the 2019/20 financial year and the second in the 2020/21 financial year.

The purpose of this article is to briefly examine the cross overs between this stimulus measure and personal bankruptcy.

Early access super – before bankruptcy

Superannuation that is accessed prior to becoming bankrupt is claimable by a Trustee in Bankruptcy and furthermore, the Trustee can usually claim the assets that are purchased using those funds.

Just because the $20,000 of super accessed by people in recent months has been done so under the unique circumstances instigated by COVID-19, it does not mean that the funds (or in most cases assets acquired with the funds) will be out of reach of a Trustee in Bankruptcy in the future.  

So be wary of accessing super pre-bankruptcy, whether generally or in relation to COVID-19.  

Early access super – after bankruptcy

The relevant issue here is how the funds are received after bankruptcy under the superannuation early access provisions. The points below are critical here in respect of COVID-19 early access super:

  • Super received as an income stream during bankruptcy is included in the bankrupt’s calculation of potential income contributions. Accordingly, some of that super may be lost as contributions to the bankrupt estate, if the relevant thresholds are exceeded (read more about this and how to calculate the contributions on AFSA’s website here).
  • Superannuation accessed as a lump sum after entering into bankruptcy is not claimable by a Trustee in Bankruptcy, and in most cases neither are the assets that are acquired with those funds. This protection is on the basis that the bankrupt has the necessary evidence to satisfy the Trustee in Bankruptcy on the source of the funds and how they were applied.

Given the ‘lump sum’ nature of the early release of super allowable thanks to COVID-19, it appears to us that these funds (and as noted above, the assets acquired using the funds) would usually be afforded protection and would not be lost in a bankruptcy.

General comments about super and bankruptcy

I have also provided some general comments about superannuation after entering into bankruptcy:

  • Funds held as superannuation are not normally a divisible asset in a bankruptcy, which means a Trustee in Bankruptcy cannot realise those funds for the benefit of creditors, subject to the comment about income contributions above.  
  • A statutory requirement, however, is that the funds must be held in a regulated fund, approved deposit fund or exempt public sector scheme.  
  • In rare circumstances, an individual may sell an asset (i.e. their house) and put the funds into their superannuation fund under the misguided expectation that the funds will be protected, however, this is not the case and a Trustee in Bankruptcy will be able to claw back the funds.

Conclusions Most people out there who have access their super early under the COVID-19 early access provisions have done so as part of a calculated effort to get through the difficult months since the pandemic commenced. One would assume that the funds accessed have been applied to the costs of living and simply getting by. The comments above are relevant to those people who are experiencing ongoing hardship and financial distress and may come in handy, from a strategic and entirely legitimate perspective, in deciding when the access their super.

About the author

Greg Quin is a Director at HLB Mann Judd Insolvency WA and has been with the team for 10 years. Greg oversees the daily operations of the many insolvency appointments managed by the team and looks after the operations of the practice.

If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to gquin@hlbinsol.com.au.

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