When advising your clients on what may be exposed in a bankruptcy scenario, you should be aware of the types of issues that are ordinarily out of reach of a Trustee in Bankruptcy.
Set out below are the types of payments an individual can retain in bankruptcy and some they cannot.
- Superannuation
Superannuation is a bit tricky:
- Super payments received before bankruptcy are claimable by the Trustee in Bankruptcy and can extend to assets purchased with those funds (i.e. a house, shares, a boat etc)
- Super payments received during or after bankruptcy are not claimable by the Trustee in Bankruptcy if it is a lump sum payment and the Trustee cannot make a claim on assets purchased with those funds.
But there is a catch…. If the individual’s superannuation is not held in a regulated fund, approved deposit fund or an exempt public sector scheme, the Trustee can claim these funds. Accordingly, individuals should check what fund their super is held in so they can make informed decisions.
If super received during bankruptcy is an income stream (i.e. a pension), these payments will form part of the individual’s assessable income and therefore income contributions may be required if the individual receives over a certain amount.
As a side note, an undischarged bankrupt cannot act as the trustee of a self-managed superannuation fund and must cease to act and advise the Australian Taxation Office within 28 days of entering bankruptcy.
- Compensation payments
The ability for an individual to keep a compensation payment depends on what type of payment it is.
A Trustee cannot claim:
- Life insurance or endowment payments that are received after bankruptcy
- Compensation for personal injury or wrongdoing
- Assets acquired wholly or substantially with these payments
A Trustee can claim:
- Life insurance or endowment payments that are received before bankruptcy
- Compensation payments that are not related to personal injury
- Tax refunds
A Trustee in Bankruptcy will calculate the proportions of the refund that lie either side of the date of bankruptcy:
- The Trustee will claim refunds for income earned before bankruptcy as an asset of the estate
- The Trustee will factor in refunds for income earned after bankruptcy into the assessable income calculation for determining any income contributions
But once again there is a catch… if the Australian Taxation Office (or any other government agency e.g. Child Support) is a creditor of the estate, any tax refunds will be retained and offset to go directly towards these debts.
- Inheritances
As we discussed in our February newsletters, inheritances received after bankruptcy can be claimed by the Trustee. The same applies even if the right to receive the inheritance occurs before bankruptcy.
Closing comments
During times of financial distress, it is easy and understandable to let these types of issues slip through the cracks. The message here is to get the right advice early and address all of the issues before making a decision about the way forward.
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.
