Question
A family member is facing severe financial difficulties and is likely to be made bankrupt as a result.
We were discussing what assets might be seized, which we assume will be his house and an investment property. However, I remember reading somewhere that superannuation is not normally available to the people who supervise bankruptcies.
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One thought I had was whether or not it is worthwhile putting extra money into super under these circumstances?
Can you clarify what the position is?
Answer
You are partially correct. Assets that are held under certain trust arrangements not under the control of the bankrupt person are generally not available to the bankruptcy trustee. This includes life insurance policies, even if there is a cash or surrender value, and this also includes insurance savings bonds.
Superannuation is another trust-based asset that is not normally available to the bankruptcy trustee, but all of these investments come with an important rider.
If the person “loaded up” these types of investments immediately prior to becoming bankrupt in order to defeat the bankruptcy, the bankruptcy trustee can have those deposits reversed.
The trustee would typically look at the normal pattern of contributions to the scheme over a period of time before the bankruptcy to determine whether or not this had been a strategy employed by the bankrupt person.
Making extra payments into super immediately prior to the bankruptcy would almost certainly attract the attention of the bankruptcy trustee.
Question
My wife and I are both retired. In 2015, we purchased a house and land package. Due to delays, it was not complete and settled until early 2017.
We are now planning to downsize further into a retirement village and would like to make a downsizer contribution to superannuation when we sell our home.
This money will be used to purchase account-based pensions to top up our Centrelink pension.
Is the contribution subject to the contributions tax? And when we die, will the remaining money be subject to the 15 per cent “death tax”?
Answer
There are several boxes that need to be ticked to make a valid downsizer contribution.
You must be aged over 55 (with no upper age limit), the funds must be contributed within 90 days of settlement, the amount cannot exceed $300,000 per person, you can only make one downsizer contribution in a lifetime and you must have owned the property for 10 years or more.
For tax purposes, the effective date is when you signed the contract, not the date of possession. With your 10-year occupancy requirement having been met last year, you will be eligible to make a downsizer contribution. Assuming you are aged over 55 you can contribute at any age.
Super downsizer contributions do not count towards any contribution caps, so if you are eligible you could make a downsizer contribution and possibly make another contribution under the normal contribution rules. That might include a brought-forward non-concessional contribution of up to $360,000 each if you are under the age of 75.
For tax purposes, the downsizer contribution is treated as a non-concessional contribution, meaning no contributions tax applies. Only concessional contributions where someone claims a tax deduction are subject to contributions tax.
If you obtain a statement from your super fund which includes the death benefit components, you will see that your total fund balance is apportioned between tax-free and taxable amounts. The taxable portion includes the concessional contributions and any investment earnings of the fund. Only this portion is subject to the so-called “death tax”.
At death, and if the benefit is payable to a financial dependant or financial “interdependant”, no tax is payable on any amount. In your case, only your wife probably satisfies this requirement.
Dependants, such as your adult children, are unlikely to be financially dependent and may be liable for tax. In any event, no tax is payable on the tax-free part, including the anticipated super downsizer contribution.
