John and Mary are individual trustees of their SMSF. John has incurred quite a substantial amount of unmanageable debts and recently entered into a voluntary bankruptcy. John is unsure what he should do as a trustee in these circumstances.
Bankruptcy is a serious issue for anyone but additional caution needs to be taken by members of SMSFs. 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.
John should immediately retire as a trustee and notify ATO in writing as it would be an offence for a disqualified person to act as a trustee of a SMSF knowing that he or she is disqualified. It would not be a convincing excuse that he was not aware of this obligation.
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.
Further, the superannuation laws expressly prohibit any representatives (i.e. Enduring Attorneys) from acting as representative trustees on behalf of bankrupt (disqualified) trustees.
As John cannot continue to act a trustee, he must also exit the SMSF as a member within 6 months of becoming bankrupt in order to comply with the requirement that all members must be trustees or directors of the corporate trustee of the SMSF.
Accordingly, his balance in the SMSF must be carefully dealt with after seeking both legal and financial advice. Generally, superannuation assets of a bankrupt 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.
It may be that statistically only a small number of SMSF members may ever be in the situation similar to John. 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.
By Jeff Song (solicitor from Townsends Business & Corporate Lawyers)
20 June 2018