Superannuation savings will be safe from creditors after July, provided the contributions were not made to avoid debts. Here are 10 tips to secure your super, the right way. By MICHAEL LAURENCE.
By Michael Laurence
SME owners should consider revising their asset-protection strategies to take account of a largely overlooked feature of the new simplified super regime. Unlimited super savings are about to become inaccessible to creditors in the event of a future financial setback – which even the most-successful entrepreneurs should guard against. This is provided, of course, you don’t try to cheat creditors and follow some basic guidelines.
Here are 10 pointers for smart SME owners:
1: Understand super’s new level of asset protection: From July 1, all super savings are protected from being accessible to trustees in bankruptcy – as long as the contributions were not made in an attempt to avoid existing or future creditors.
Under a provision in the Bankruptcy Act in force until July, a bankrupt’s super savings are protected up to the pension reasonable benefit limit (RBL) of a little more than $1.3 million. Super savings above this cap automatically vest in a bankruptcy trustee if a fund member becomes bankrupt.
But recently passed superannuation legislation, taking effect in three months’ time, removes references to RBLs from the Bankruptcy Act to fall in line with the new simplified super system, which abolishes RBLs as one of its headline features.
The explanatory memorandum for the new super law contains the magnetic words for anyone seeking asset protection through super in the event of some future setback: “A bankrupt’s entire interest in superannuation is protected from being divisible among creditors.”
2: Understand why asset protection is vital for all SMEs: Brett Davies, a director of Brett Davies Lawyers in Perth, says the instigation of asset-protection strategies is critical for all SME owners – even those who are running highly profitable businesses. Asset protection is like insurance, it is simply guarding against the possibility that something might go wrong.
Sydney tax lawyer Robert Richards adds: “As soon as business owners begin to accumulate assets, the first thing they tend to think about is protecting those assets.”
3: Watch out for personal responsibilities of directors: Philip de Haan, a partner of Sydney solicitors Cutler Hughes & Harris, points out that the personal responsibilities of company directors under the Corporations Act are “getting tougher and tougher”. These could lead to attempts to gain access to the personal assets of directors and to their eventual bankruptcy in some cases.
For instance, directors who allow a company to continue trading when there are reasonable grounds for suspecting that it is or may become insolvent can be held personally liable for its debts after a certain point. And losses and damages arising from misleading and deceptive statements may be recoverable from directors.
As well, lenders often insist that SME owners go guarantor for business loans – although lawyers and accountants generally recommend that their business clients, if possible, do not personally guarantee business loans.
De Haan says vital reasons to increase your super include, of course, saving for retirement, and trying to separate your personal and business assets.
4: Consider maximising your super contributions: de Haan says the much greater asset protection of super from July provides more reason for anyone in need of protecting their personal assets to contribute up to the new annual contribution limits.
From July, members can make after-tax contributions of up to an indexed $150,000 a year, or $450,000 every three years. (As explained in SmartCompany’s wealth/super section on March 20 – see Seven strategies for making extra-large super contributions – vendors of small businesses have special opportunities to make particularly large super contributions even after July 1 using certain proceeds from the sale of their enterprises.) And between May 10, 2006, and June 30, 2007, course, all members of super funds with the necessary means can contribute up to $1 million after tax.
Plus, members can contribute from July 1 so-called “concessional” contributions (mainly salary-sacrificed amounts, and deductible contributions by the self-employed) of up to an indexed $50,000 a year or $100,000 a year (non-indexed) until June 2012 if over 50. (The long-standing age-based limits still apply for the current financial year.)
5: Don’t try to cheat your creditors: This point should be made again and again because it could destroy your attempts to protect your personal assets. Asset-protection strategies designed to cheat creditors won’t work in law. The Bankruptcy Act allows trustees in bankruptcy to recover superannuation contributions made before bankruptcy with the intention of cheating existing and future creditors. De Haan believes not many fund members understand that a bankruptcy trustee can claw back contributions made with the intention of avoiding future (as well as past) creditors.
In a practical sense, de Haan says his warning about future creditors means that super fund members should not make contributions with the main purpose of avoiding debts that may arise even in the future but make contributions with the primary purpose of making sound investments and saving for retirement. He says a way to show that your super contributions are part of an investment plan is to contribute regularly.
Amendments to the bankruptcy laws state that bankruptcy trustees can recover contributions from July 28 last year that are made bankruptcy to avoid creditors. Federal Parliament has passed the amendments, which were just awaiting the formality of royal assent at the time of writing.
As de Haan says, this power to recover any contributions intended to defraud creditors already exists in law but the amendments “make it crystal clear”.
6: Keep your super contributions to an even pattern: In determining whether contributions were made to defraud creditors, amendments to the Bankruptcy Act will allow courts to consider whether a bankrupt’s pattern of past contributions were “out of character”. (Federal Parliament has passed the amendments to take effect from July 28, 2006. Again, at the time of writing, it is just a matter of gaining the formality of royal assent.)
Martin Heffron, co-principal of the self-managed fund specialist Heffron Consulting in NSW, says that while the improving asset-protection attributes of super have been overlooked by many fund members, the imminent changes don’t mean that people can contribute “willy-nilly into super” and enjoy protection from creditors. Heffron urges fund members to consider the ability of the courts to consider the pattern of past contributions.
7: Watch out for being a “sitting duck”: Stuart Jones, superannuation specialist with tax and legal publisher Thomson, warns that if a bankruptcy trustee can satisfy any of the provisions to access the savings in super, the “money will be a sitting duck for a claim by creditors as it is locked away in the superannuation [until the member permanently retires on reaching at least 55.]”
8: Be aware of super death trap: Lawyer Brett Davies emphasises that most super death benefits could be taxed at 16.5% within a fund if being paid to a non-dependant of the deceased. Davies says this is a key consideration for anyone building up very large super savings because most fund members’ beneficiaries will be financially independent adult children.
Super death benefits paid to non-dependants caught by this tax will mainly comprise salary-sacrificed contributions, tax-deducted contributions by the self-employed, and fund earnings. After-tax contributions, super savings deemed to have been saved before 1983, and contributions arising from CGT-free amounts from the sale of a small business will not be taxed if paid to non-dependants of a deceased member.
9: Consider you could be locking your savings away in super for a very long time: Martin Heffron of Heffron Consulting and lawyer Brett Davies both say that younger members in particular should keep in mind that contributions and assets transferred into super will be locked away until members permanently retire after reaching, as already discussed, the so-called preservation age, currently 55. (The few exceptions are transition-to-retirement pensions for members over 55, incapacity, and in limited instances of extreme financial hardship or on compassionate grounds.)
10: Look at new opportunities for business real estate: As SmartCompany emphasises again and again, business real estate – such as factories, warehouses, strata offices and shops – is one of the few assets that diy funds are permitted to acquire from their members. And business real estate is one of the few assets that funds can lease to related parties (including fund members and their businesses) without a restriction on its value.
The great asset protection of super from July may encourage SME owners to transfer more valuable business properties into their DIY funds than in the past.