Insolvency Update – Spring 2013
Section 116(2)(d) of the Bankruptcy Act provides that the interests of the bankrupt in a regulated superannuation fund is excluded from property divisible amongst the creditors of the bankrupt. But that section has some riders. Firstly, s 121 of the Bankruptcy Act provides that if a deposit into the superannuation fund is made where the transferor’s main purpose was to prevent the property from becoming divisible amongst the transferor’s creditors, it can be clawed back.
How do you get caught by s 121? It can be enough if the transferor is aware at the time of the transfer of potential future liabilities outside the normal. Moreover, intention can be inferred from the circumstances. See Trustees of the Property of Cummins – v – Cummins (2006) 224 ALR 280,  HCA 6. Furthermore, under s 128B, where transfers of moneys to a regulated superannuation fund are inconsistent with the pattern of earlier superannuation contributions, an intention to defeat creditors can be inferred. Under s 128C, where a third party makes contributions to the debtor’s superannuation fund, an intent to defeat creditors can be inferred if the pattern of making contributions to the debtor’s superannuation fund is inconsistent with earlier payments (if any).
And that is not all!
Under Div 260 of Schedule 1 of the Taxation Administration Act 1953, the ATO can garnishee a person’s superannuation entitlement, but the garnishee only operates when the superannuation entitlement is owing, due or payable.
What does this mean? The Practice Statement Law Administration PSLA 2011/18 issued to ATO staff states that “a garnishee notice in respect of any tax-related liabilities may be served on a superannuation fund but it will not be effective until the debtor’s (member’s) benefits are payable under the rules of the fund (for example, the debtor retires or dies). A notice served on the fund will generally require payment as a lump sum unless the anticipated retirement income stream can guarantee repayment within a satisfactory period of time.”
The ATO sought to use its garnishee power against a taxpayer-debtor’s superannuation entitlement in Denlay – v – FCT  FCA 307.
Of course, the notice issued by the Commissioner is similar to but legally distinct from a garnishee order issued through the courts. The Uniform Civil Procedure Act applies where any creditor seeks to garnishee third party payments to debtors.
Moreover, the capacity of the ATO (or any other creditor) to issue a garnishee notice is not limited to superannuation interests as such but extends to other interests of a superannuation nature such as amounts in approved deposit funds.
But what is the superannuation amount that is owing, due or payable? It is the benefit payable following satisfaction of a condition of release.
The Superannuation Industry (Supervision) Act 1993 (SISA) sets standards below which a superannuation fund must not fall, otherwise it will lose its compliance status and tax concession entitlements. However, a fund trustee may express conditions of release that are higher or later – for example, have a look at reg 5.01B of the SISR which provides that a trustee may provide greater benefit protection than otherwise required by the SISA and SISR.
So those catch-all clauses in trust deeds which prescribe that if there is an inconsistency between the SISA (and SISR) and the terms of the deed, then the terms of the SISA and SISR prevail, can undo all the drafter’s other good clauses!
What is more, a death benefit dependant’s interest cannot defeat a garnishee. This is because the dependant’s interest is not of a trust nature and it cannot therefore impact on the member’s interest.
A valid binding death benefit nomination does not give the nominee a beneficial interest in the superannuation fund, carved out of the legal estate of the assets in the trust. It imposes upon that legal estate an interest that is conditional upon the taxpayer-debtor’s interest not being earlier paid to the taxpayer-debtor. It is also conditional upon the nominee taking or calling for a fully vested and absolute interest.
The only time where the garnishee notice procedure cannot apply is if the debtor is bankrupt.