Bankruptcy is a bigger issue than ever and not likely to disappear soon. As our economy is still struggling in its hinges, grinding its way towards greener days, businesses around the country are facing tough times.
Bankruptcy ever present, just look at the job losses across the board:
The signs are ever present as more and more companies and businesses have to let go of their staff to try and survive on minimum costs and overheads. This is often the last attempt at salvage.
The consequences of declaring bankruptcy include:
- Loss of control of your financial affairs.
- Difficulty to obtain credit.
- Being banned from certain occupations, from holding certain licences and from being a company director and trustee of a super fund.
- Difficulty travelling overseas.
The only things protected by the power of a bankruptcy trustee are basic furniture and effects – excluding valuable antiques, paintings and valuable jewellery. The same goes for a vehicle used as a means of transport (eg, car or motorbike) and tools of the trade up to certain limits (indexed annually). Property held in trust for others is also generally protected.
Benefits held in a super fund for an individual are treated differently than assets if a person or business declares bankruptcy. A member’s superannuation account balance held in a regulated super fund is protected in a bankruptcy case.
Despite this protection, there are circumstances in which certain contributions made to a super fund can be recovered and included in divisible property.
Some of these include contributions made by the individual or a third party on behalf of the individual. These could include employer contributions such as salary sacrifice.
Similar to above, pensions are also protected from bankruptcy. It is important to note that income pension payments will be treated as ordinary income and may be caught under the normal bankruptcy provisions.
If the superannuation trustee has already made lump sum payments, these cannot be recovered by the bankruptcy trustee, e.g. in the event of death of the person declaring bankruptcy.
In some instances cash values of life insurance and TPD policies are also protected. The protection for life insurance policies exists so that a bankrupt person can insure themselves and their family against death and disability.
Payments to the bankruptcy trustee:
Once declared bankrupt, a person or business is required to make regular payments or ‘contributions’ to the bankruptcy trustee. This is for the benefit of creditors where their net income is above a certain threshold.
- Salary and wages.
- Salary sacrifice arrangements (including superannuation).
- Voluntary employer superannuation contributions in excess of those required under Super Guarantee, industrial award or law.
- A superannuation pension or annuity.
- Value of fringe benefits from employers.
- Payments made on termination of employment.
- A pension or annuity paid under a policy of life insurance.
Half of the assessable income in excess of the ‘actual income threshold amount’ will have to be paid to the bankruptcy trustee. The calculations are made according to the following formula:
Assessed income minus the actual income threshold amount divided by two. The actual income threshold amount is based on the ‘base income threshold amount’ of $41,823.60 (current to September 19, 2009). This will increase depending on the bankrupt’s number of dependants.
Capital gains tax and bankruptcy:
When a bankrupt’s assets pass on to the trustee, no capital gains tax (CGT) will have to be paid.