Q: Is superannuation safe from bankruptcy, and do the bankruptcy rules also apply to superannuation death benefits?
A: If you are declared bankrupt your assets “vest” with the bankruptcy trustee to be paid to creditors. However, a bankrupt’s superannuation savings are protected, as long as the money is in a regulated fund.
In a recent case, the Federal Court shed light the treatment of superannuation death benefits paid to bankrupts. In Cunningham (Trustee) v Gapes (Bankrupt) the court ruled that a superannuation death benefit paid via a deceased estate to the spouse of a bankrupt was accessible by creditors of the bankrupt and not protected under the Bankruptcy Act.
The proceeds of the deceased’s superannuation fund were paid to the deceased estate, from where they were distributed to three beneficiaries, one of whom was the bankrupt, Andrew Gapes (Gapes did not have a bank account at the time so the money was actually distributed to his wife).
The court ruled that the money “vested” in the bankruptcy trustee and was “divisible” amongst the creditors.
The court rejected Gapes’ claim that the money represented a payment from a regulated superannuation fund received after the date of bankruptcy and therefore protected.
It ruled that the payment was not from a regulated super fund. It said that while the money may have originally derived from a regulated fund, it did not retain its “superannuation character” after it was paid to the deceased estate from which it was distributed.
It also said the bankrupt’s only claim on the money was via the deceased’s will.
The court made a distinction between the circumstances of this case and a 2016 case, Morris v Morris, where the superannuation death benefit paid to the bankrupt was protected from creditors.
In Morris v Morris, the bankrupt spouse received payments directly from her husband’s super fund following his death.
The court said that in the Gapes case there were no direct payments from the super fund.