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KiwiSaver funds protected from creditors
 
Q.           Can you settle an argument I have been having with my boyfriend? He is self-employed and has been saving into KiwiSaver since it started, and his balance is now over $40,000. His plan is to use the money to buy a first home one day. His business does all right but often he has a lot of money owed to him and if there was a downturn things could turn to custard. He thinks if he went bankrupt his creditors would get the money in his KiwiSaver but I don’t think they would. Who is right? 

A.          When the KiwiSaver Act was passed in 2006 it did not make any specific provision for bankruptcy, and this issue has brought the Official Assignee into conflict with KiwiSaver trustees, who look after the interests of KiwiSaver members. 

The argument mainly turns on the definition of ‘significant financial hardship’, which is one of the few ways that KiwiSaver funds can be released before the member turns 65, and the only possible avenue available to the Official Assignee (OA) for repaying creditors. Members can apply to the trustee of their KiwiSaver fund to withdraw money if they are experiencing significant financial hardship such as inability to meet minimum living expenses, an inability to meet mortgage repayments, or serious illness. 
The Official Assignee took a case against Trustees Executors, which was first heard in the High Court in early 2014. Judge Ronald Young decided in the High Court that the balances in the bankrupts’ KiwiSaver accounts at the date of adjudication and any additional sums accumulating during the period of their bankruptcy vested in the OA, but under the KiwiSaver Rules the OA may not be able to access these funds until the bankrupt reached the age of 65. 

This ruling was taken to the Court of Appeal by Trustees Executors last month, and was overturned. The Judges concluded that the KiwiSaver interests of a bankrupt did not vest in the OA. The Court of Appeal Judges decided ‘that bankruptcy will ordinarily result in some of the forms of hardship the OA described, but we do not accept that Parliament intended that early withdrawal could be permitted to address hardship of that type.’

It was argued that meeting ‘minimum living expenses’ did not include paying a bankrupt’s general creditors. 

There is nothing in the KiwiSaver Act to suggest that a purpose of the legislation is to accumulate funds for the benefit of creditors in the event of the member’s bankruptcy.  So it looks like your boyfriend’s savings are safe if, as you put it, ‘things turned to custard’.

During the case the Official Assignee reported that there were 5,559 bankrupts with KiwiSaver accounts totalling over $27.3 million. The average value of these accounts was $6,070 and 58 per cent of bankrupts with a KiwiSaver account were less than 50 years of age.   The two KiwiSaver members represented by Trustees Executors both had balances under $12,000. 

In the wake of this Appeal Court decision, will people in business divert more money into their KiwiSaver accounts to protect it from creditor claims?  Australian legislation allows for assets transferred to a superannuation fund in an ‘out of character transaction with the intention to defeat creditors’ to be clawed back. It is likely that similar legislation will be considered by our Government to cover situations like this. 


Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838 or go to www.peak.net.nz. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to
shelley.hanna@peak.net.nz