With the continued rise of Self-Managed Superannuation Funds (“SMSF”) bankruptcy trustees are frequently considering the effect bankruptcy has on the fund and if they have any interest in the fund. A bankrupt needs to be aware that they cannot sit back and do nothing in order to protect their SMSF.
SMSF and Bankruptcy
SMSF’s are managed by a corporate trustee or an individual trustee where a member of the SMSF is also required to act as the director of that corporate trustee or personally as the trustee of the SMSF. If multiple members exist then all members must be directors or trustees.
If a member of a SMSF becomes bankrupt, they will no longer be able to act as a trustee or as a director of a corporate trustee in respect of their fund, as they will be a disqualified person for the purposes of section 120 of the Superannuation Industry (Supervision) Act 1993 (Cth) (“SIS Act”).
Section 17A(10) of the SIS Act makes it clear that a member who has become disqualified, for example due to bankruptcy, cannot appoint a legal personal representative to act in place of the disqualified person. Accordingly, a bankrupt person cannot be a trustee/director, and therefore cannot be a member of a SMSF.
Rolling Over the SMSF
Pursuant to section 17A of the SIS Act the bankrupt who is a member of a SMSF is required to sell the assets, rollover or transfer his share of funds held in the SMSF to another fund within six months of the commencement of his/her bankruptcy.
This means if the bankrupt is the sole member of the SMSF and the sole director of the corporate trustee, a new director will need to be appointed immediately and the Bankrupt must remove themselves as trustee/director of the corporate trustee. Failure to resign immediately as a trustee of a SMSF is an offence and exposes a bankrupt to a maximum fine of $10,800 or up to two years imprisonment. Ideally this should be done prior to bankruptcy or immediately once a person is declared bankrupt.
Appointment of a Registered Superannuation Entity (RSE)
For larger SMSF balances or where the break costs to cash out are significant, there may also be justification in the bankrupt appointing a replacement/acting trustee (RSE) to avoid non-compliance penalties until the member/trustee/director is discharged from bankruptcy.
Notification of Changes to SMSF
The Bankrupt must also inform the ATO in writing using Form NAT 3036 within 28 days of the change and the Australian Securities & Investments Commission (ASIC) if the Bankrupt is a director of a corporate trustee. Failure to notify the ATO can impose a maximum penalty of $9,000.
The bankruptcy Trustee will not interfere with the rollover or transfer unless he/she believes that the SMSF received contributions which may be recoverable under section 128B (contributions made by the bankrupt) or 128C (contributions made by a third party) of the Act to prevent the property from being divisible among creditors.
Non-Compliance with the SIS Act
Pursuant to section 116(2)(d) of the Bankruptcy Act 1966 (Cth) (“the Act”), funds held in a regulated superannuation fund are not recoverable into the bankrupt estate, that is, they are retained by the bankrupt.
The requirements for a regulated superannuation fund are set out under section 19 of the SIS Act. Regardless of the fund’s non-compliance with the SIS Act, the Bankrupt’s interest in the fund likely maintains the protection afforded by section 116(2)(d)(iii)(A) of the Act, meaning it is not an asset that will vest in the bankruptcy trustees. However, if the fund was not ‘regulated’ at the time of bankruptcy it may be argued that the fund vests in the Trustees.
Case Study 1:
In the ordinary course, superannuation will be protected in Bankruptcy as it falls under the category of ‘non-divisible‘ but what happens if the fund is not a regulated fund and non-compliant?
In a recent case, the bankruptcy trustees confirmed the fund’s assets consist of cash at bank totalling approximately $135,000. A search on the status of the fund using the Federal Government’s Super Fund Lookup Tool disclosed the fund was listed as “regulation details removed”. This was due to the non-lodgement of tax returns.
The corporate trustee (i.e. the company) of the fund was deregistered prior to the bankruptcy. The bankrupt was the director of the company and the sole beneficiary of the fund.
Upon the corporate trustee’s deregistration, the fund automatically vested in the Commonwealth pursuant to section 601AD of the Act. Given the fund was non-compliant and did not have a corporate trustee at the time of bankruptcy we have written to the Commonwealth requesting the funds be remitted to the bankrupt estate as they are no longer funds capable of attracting the protection of section 116(2)(d)(iii)(A) of the Act.
It should be noted in the above circumstances it appears the fund was a ‘regulated’ superannuation fund at some time prior to deregistration of the company but not at the date of bankruptcy.
A regulated fund is a complying fund if the fund’s regulator, being the ATO for an SMSF, has issued a notice of compliance to the trustee in accordance with section 40 of the SIS Act, in relation to the relevant year of income, or if such a notice has been issued in relation to a previous year of income and the regulator has not issued a notice of non-compliance in relation to that or a subsequent year of income, in accordance with section 45 of the SIS Act. The SMSF will likely not vest in the bankruptcy trustee when considering non-compliance in isolation, however, will have tax consequences as a non-compliant SMSF will be taxed at the highest marginal rate, being 45% for 2017/2018.
Case Study 2:
You are facing bankruptcy and have an SMSF with your spouse where you are both trustees and members.
Once the bankruptcy occurs, you will need to exit the SMSF. If there is a corporate trustee, you will need to resign as a director immediately and also remove yourself as a member within 6 months after the date of bankruptcy.
During the six month grace period, the assets will need to be sold (if there are non-cash assets) and rolled over to a retail or industry fund. There is an option to convert the fund to a small fund regulated by the Australian Prudential Regulation Authority which can be expensive and advice should be sought on the best option available depending on your circumstances.
This is obviously vitally important in order for Bankrupts to protect the superannuation they have accumulated for their retirement.
The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 1300 1 VAULT (1300 182 858)