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What to do in an SMSF’s worst-case-scenario

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Declaring bankruptcy isn’t something anyone wants to do, but SMSF trustees have extra concerns to be aware of, a solicitor has said.

“It may be that statistically only a small number of SMSF members may ever be in the situation,” Townsends Business & Corporate Lawyers solicitor Jeff Song said.

“However, a number of precautionary measures can be built into the terms of the trust in order to alleviate some of the issues raised above such as automatic retirement of a trustee who becomes bankrupt or otherwise disqualified to act as a trustee.”

He gave the example of one SMSF with individual trustees, John and Mary. Should John incur unmanageable debts and enter into voluntary bankruptcy, John needs to remove himself as a member and a trustee to stay on the right side of the law. 

“Bankruptcy is a serious issue for anyone but additional caution needs to be taken by members of SMSFs,” Mr Song said.

“The superannuation laws expressly disqualify any undischarged bankrupt person from acting as a trustee or director of corporate trustee of a SMSF and this disqualification extends to persons who are bankrupt under the laws foreign countries.”

As such, John would need to retire immediately as a trustee and tell the Australian Taxation Office in writing. It’s an offence for a disqualified person to act as an SMSF trustee while knowing they are disqualified, Mr Song said, noting that pleading ignorance won’t get trustees over the line. 

“As a trustee of a SMSF, John would have formally declared (by signing a mandatory ATO declaration form) that he understands his obligations as a trustee and that if he does not comply with the relevant legislation regarding the superannuation fund, the commissioner may prosecute him under the law, which may result in fines or imprisonment,” the solicitor said.

John also can’t ask a representative, like an enduring attorney, to act as a representative trustee. 

SMSFs need to have all members be trustees or directors of the corporate trustee, and as such John will have to leave the SMSF as a member within six months of becoming bankrupt.

“Accordingly, his balance in the SMSF must be carefully dealt with after seeking both legal and financial advice,” Mr Song continued.  

“Generally, superannuation assets of a bankrupt person held in a complying superannuation fund are protected from the creditors, however certain contributions made to the SMSF may not be protected if the main purpose of the contributions was to keep the assets from being available to the creditors.”

What to do in an SMSF’s worst-case-scenario
worst-case-scenario, question mark
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