Bankruptcy and SMSFs
When an individual suffers bankruptcy, one of the last things they consider is their Self-Managed Superannuation Fund (SMSF).
When a Trustee becomes insolvent or is declared bankrupt, they are classified as a disqualified person. A disqualified person should not be a Trustee of a Superannuation Fund or a Director of a Corporate Trustee. Under Section 126K of the Superannuation Industry Supervision Act 1993 (SIS Act), penalties can apply, if a person continues to act as a Trustee of the SMSF after knowing they are disqualified.
Those who are a member of an SMSF must also be an individual trustee or director of a corporate trustee. A disqualified person cannot be an individual trustee nor director of a company trustee – hence the problem.
So when a trustee becomes a disqualified person, it poses a serious problem to the SMSF and puts the entire fund at risk.
If you are a Director of a Corporate Trustee, you may also have obligations to inform the Australian Securities & Investments Commission (ASIC).
For more information, see the ATO Commissioner Practice Statement on disqualification of the Trustees (PS LA 2006/17).
If you become bankrupt or enter into a personal insolvency agreement, you must:
Remove yourself as a trustee
You must cease being, or acting as a trustee immediately. This must be notified to the tax office within 28 days.
Restructure your SMSF
After removing yourself as a trustee, the SMSF has 6 months to restructure in order to meet the definition of an SMSF. The basic definition of an SMSF is that all members must be trustees and all trustees must be members and there must be more than one and no more than four individuals.
The other trustees or directors of the corporate trustee have the following options:
- Rollover the bankrupts benefits to another complying superfund e.g. Retail or Industry funds
- Appoint an approved trustee who has a license from APRA i.e. the SMSF changes from being self managed to being a Small APRA Fund (which becomes managed by someone else);
- Wind up the fund by rolling all members’ benefits out of the fund and into another appropriate super vehicle.
How to become a trustee of an SMSF again?
A person, who was disqualified due to insolvency/bankruptcy, cannot have their disqualification status waived during the period of administration.
However once they have been discharged from bankruptcy, they are no longer a disqualified person and can become a trustee of an SMSF again.
Disqualification may be a result of a conviction involving dishonesty or a court determination. If a person became a disqualified due to conviction involving dishonesty, they may apply for a declaration to waive their disqualified status. This must be done within 14 days after the date of their conviction. And under a court/regulator disqualification, application must be made to request the court/regulator to revoke the disqualification.
Due to the tight deadlines, restructuring and the highly involved nature with the regulators, we urge any person who may become insolvent or bankrupt and holds an SMSF to contact our office.