The Federal Government has put measures in place to help protect businesses from insolvencies stemming from the COVID-19 economic downturn. Yet not all businesses will come through to the other side and bankruptcy will be a reality for some.

So, what happens to super benefits (ie, lump sums and pensions) when a superannuation fund member goes bankrupt?

Bankruptcy provisions

Back in 2007, there were significant changes to what happens to superannuation upon bankruptcy. The main change was the deletion of the provision in the bankruptcy legislation that effectively provided that the excess over the bankrupt’s pension Reasonable Benefit Limit (RBL) was available to creditors.

This means that, from 1 July 2007, a bankrupt’s entire interest in a superannuation fund is generally protected from being divisible amongst creditors. So is any lump sum received from a superannuation fund. So for example, a bankrupt who receives, say, a lump sum of even $1 billion from a superannuation fund, could keep that money in their own name. Typically, all that money would be unavailable to their creditors.

What about pension payments?

Pension payments received from superannuation funds are not afforded the same protections as an interest in a super fund. Pension payments are treated as income and income only receives minimal protection from creditors. The exact level of protection afforded to pension payments is adjusted for inflation twice a year, and the most recent the level is as shown in Table 1.

Table 1: Level of protection afforded to pension payments

SMSF trustees and bankruptcy

Remember that a ‘disqualified person’ must not be a trustee of a superannuation entity. A disqualified person includes a person who is an insolvent under administration (which includes an undischarged bankrupt). This means SMSF members who become bankrupt can no longer be trustees or directors of a fund and will need to roll out of the SMSF.