Does Bankruptcy affect your Super?

For many small business owners and self-employed individuals, a SMSF is an asset that can be protected against pretty much anything, including bankruptcy. Whilst it is something not many people would like to think about let alone admit, bankruptcy is most definitely an inherit risk with any business, especially for start ups. In fact, every year more than 20,000 Aussies claim bankruptcy meaning it is definitely an event that needs to be explored and considered by all.

However, a common belief that SMSFs are untouchable stems from the long-standing provisions in bankruptcy laws that state that some assets, such as a car worth less than $7500, tools used to earn a living worth less than $3650 and superannuation savings are protected from creditors.

For the most part, these provisions ring true. But be aware that where super will not be protected.

Case Study

A recent case in Victoria has come to light wherein a business that borrowed money to make contributions to super on behalf of the owners goes broke. In this case, it is possible for the lenders to successfully sue the SMSF for the money back.

This business, ABC Pty Ltd* borrowed $2.5 million from Macquarie Bank in 2007 partly to make contributions to super on behalf of the owners. They did so in the hope of taking advantage of the one-off opportunity of investing $1 million into super on a non-concessional basis during 2006-07 that was granted to individuals at the time before the entitlement was reduced to $150,000 a year.

The court found that the director of ABC Pty Ltd contributed nearly $1.7 million from the business to his SMSF for himself and other family members during 2007 and 2008. Furthermore at the time the business had liabilities of more than $3.5 million, including the $2.5 million loan from Macquarie, which was borrowed on commercial rates and fees with the intention that the loan would be repaid by the business by the end of January 2011.

The director had originally planned to borrow the money under his name but decided that the business would benefit more as the borrower in terms of being able to claim interest as a tax deduction. The money was then contributed to the fund by the director in the form of sham eligible termination payments or as employer or self-employed superannuation contributions. These termination payments were considered fraudulent as neither the director nor his wife (whom the payments were made out to) had retired or had any intention of retiring.

The court found that although the business was solvent when it borrowed the money from the bank, the director was obliged to act in good faith to ensure that the money was dealt with honestly and properly. The director of the business also has a legal responsibility to ensure the business isn't knowingly put at risk because of such actions as making significant contributions to super at the expense of the business.

The director had been found to be of a "directing mind and will" and was fully capable of understanding and knowing what his responsibilities were as a director. He was also the most active director out of the four within the SMSF and was the primary individual in charge of making all transactions and directed and oversaw each and all of the payments into the SMSF. Therefore, the court found that the SMSF had indeed had the knowledge that the money was received in breach of a legal responsibility. The trustee of the SMSF was found to be liable to pay back all the money to the receivers and managers of the business.

Therefore the super fund had to repay the contributions based on a legal principle identified as "knowing receipt" wherein an entity receives property - which can be in the form of money - whilst knowing that it had been transferred under a breach of its legal responsibility.

This case should prove as a warning to all those who think that their SMSF is impervious to outside factors, including bankruptcy. SMSF directors and trustees need to be fully aware that these types of complex legal structures come with important obligations and the repercussions can be far-reaching.

For more information on running or setting up a SMSF, contact us on 02 9299 7044 or via

*Name of company has been changed

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