I keep hammering it in to my small business clients that while they may be passionate about their business and absolutely certain it will succeed, that they need to have a Plan B. Things can and do go wrong no matter how hard you work.
Superannuation is that Plan B in many cases. By putting away a portion of your profits each year to super you can minimise your tax obligations, save for retirement and protect some of your hard-earned wealth from unforeseen circumstances like a business collapse.
I always give an example of the client who had a very successful software business that was making decent money every year who listened to me and put funds away in superannuation yearly despite not wholly trusting the system. 6 years ago a dodgy overseas firm copied and made minor changes to his software and sold it for 10% of his price, thereby decimating his profits. He could lose everything as the ensuing defence of his patents in court cases is wiping out his personal and the company’s finances. Even if he wins, they could just keep their assets overseas and he has no chance of recovering costs and damages. The one thing protected is his Superannuation which will provide a decent if not a bit less comfortable retirement than expected.
A recent case shows the benefit of having superannuation funds when all else fails to protect you and your loved ones. In the case of Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) [2016] FCA 846 shows just what happens when superannuation, bankruptcy and the payment of death benefits intersect.
Background
Ms Morris became bankrupt 3-4 months after her husband, Mr Foreman, died. Mr Foreman held two policies with two different superannuation funds: AustSafe Super and Plum Super.
After becoming bankrupt, Ms Morris received three separate payments. Plum Super made a life insurance payment of $311,865.95 to Mrs Foreman, which is not controversial as section 116(2)(d)(ii) of the Act provides that divisible property does not extend to life assurance policy proceeds of a bankrupt—or their spouse—received on or after the date of bankruptcy. SAFE
What was ‘controversial’ was AustSafe Super’s payment of $45,392.48 and Plum Super’s payment of $67,240.27. Those funds made these payments to the bankrupt under discretionary powers, as Mr Foreman had not nominated any dependents or beneficiaries.
Mrs Morris’s bankruptcy trustees applied to court in respect of these payments arguing that the superannuation monies received by the bankrupt were after-acquired property that vested in them (as bankruptcy trustees) and was therefore divisible among the bankrupt estate’s creditors. Uh Oh trouble!
I am not lawyer so I will not go in to details of the argument but I am happy point you to a good lawyer for the detail of the argument and some interpretation of the decision in a good blog by Bryce Figot of DBA Lawyers – See more at here and the actual case decision here
In summary
Justice Logan held that prior to the superannuation fund trustees’ exercising their discretion in favour of Ms Morris, she had no interest in either fund; however, upon this favourable decision, an interest was then created in the superannuation funds, and therefore these payments (totalling $112,632.75) made to Ms Morris (after bankruptcy) were held to be captured by s116(2)(d)(iii) and s116(2)(d)(iv) of the Act. Consequently, the bankruptcy trustees were unsuccessful with their application.
So superannuation death benefits received by the bankrupt were protected from Bankruptcy Trustees
I have not seen any previous guidance or authorities about the meaning and effect of the above sections of the Act, however the decision seems to be consistent with the intention of legislation to protect and preserve benefits in respect of retirement for both members of funds as well as their spouses and dependents.
If you or your spouse are in business or a highly litigious profession or high risk investors that could lose all if investments go wrong then come and talk to us about Your Plan B
I hope this guidance has been helpful and please comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
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