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Bankruptcy forfeiture provisions an illusion

Trustees and advisers have been advised not to rely on forfeiture provisions contained in SMSF trust deeds supposedly stipulating how a member’s benefits can be treated when they are declared bankrupt, a legal expert has said.

Speaking at the recent Chartered Accountants Australia and New Zealand 2016 National SMSF Conference in Melbourne, Hall and Wilcox partner Heather Gray explained the provisions in question usually stated if a member of an SMSF became bankrupt, then all of their entitlements in the fund were forfeited.

Gray added the provisions were often included in conjunction with other clauses saying those assets could then be applied for the benefit of the dependants of the bankrupt member or in some other way the trustee thought appropriate in the circumstances.

“This is an illusory provision that still sits in a lot of trust deeds,” she said.

“They can’t be applied for two reasons. One is they’re specifically void under a section of the Bankruptcy Act which just says if you’ve got something in your trust deed which would have an effect that the interest of a bankrupt member ends up being forfeited on bankruptcy, it’s just void.”

“And then it’s also effectively void because of SIS (Superannuation Industry (Supervision)) regulation 13.16 and that’s the operating standard that says you can’t do anything that would adversely impact the accrued rights to benefits that one of your members has got in the fund.”

She pointed out they were still contained in some deeds even though they were void in anticipation of potential future legislative change.

“They’re still in some deeds because it’s something that for a long time was considered to be very useful and seen to provide very good robust protection for people, and until the change to the Bankruptcy Act and the provision in the SIS reg they actually could be used and they were of value,” she said.

“And so many practitioners have said: ‘You know what, they can’t be used at the moment, but if for some reason the law changed, if we had some significant change to superannuation bankruptcy rules and it was no longer impossible to access the power under those provisions, we probably couldn’t amend the trust deed to put it in because it would be providing for a circumstance in which somebody’s entitlements might be taken away from them.’

“So a lot of practitioners have left those provisions in deeds just purely for that reason.”

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