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Bankruptcy preferable to illegal early release

bankruptcy illegal early release

Trustees looking to raid their SMSFs to prop up a small business would be better off facing bankruptcy than the consequences of illegal early release.

SMSF advisers should strongly recommend trustees do not consider the early release of money from their superannuation fund to support a business during the current COVID-19 lockdown, even if it may result in bankruptcy, an SMSF legal expert has stated.

Commenting as part of a webinar last Friday dealing with the impact of the lockdown on SMSFs, DBA Lawyers special counsel Bryce Figot said financial advisers and accountants should be giving clients ‘tough love’ if the issue of using super money to prop up a business or pay employees is raised.

“Some clients will say to you ‘I have to raid my SMSF to support my business’ or even worse ‘I had to do it’, so they have already done it. Their justification is having to support their business and the conclusive part of their argument was the move was not about them but ‘if I had not, all my employees will/would be on the dole’,” Figot said.

He added that people will also argue the government prefers trustees to access their SMSF in such cases, rather than putting people on the dole, and the fund trustee can pay back the funds when possible.

These questions and arguments were not uncommon, but SMSF practitioners should take a strong stance on recommending this course of action because of the very specific nature of the release regime connected to SMSFs and bankruptcy laws, he said.

“If you have clients that may go to the wall, they will greedily eye the SMSF, but unless a relevant condition of release has been satisfied, they are not allowed to access the SMSF,” he said.

“This is the bad news you will have to deliver and it’s better to deliver that news now than they raid their super and get some really bad news later on.

“The legislature has set up a very specific regime, and clients will struggle to believe it, but it prefers you go bankrupt and put employees on the dole than giving early access to super.

“We have represented clients who have used their superannuation and the argument of ‘if I didn’t raid my super, I’d be on the age pension and my employees would be on the dole’ did not gain much traction with the ATO.”

He also pointed out that if an SMSF trustee’s business did go bankrupt, their superannuation funds would remain separate and untouched as part of the bankruptcy proceedings because under the Bankruptcy Act 1966 any interest in a super fund was carved out and any money in a regulated super fund was unavailable to creditors upon bankruptcy.

This was worth remembering as the recent omnibus act related to COVID-19 relief, the Coronavirus Economic Response Package Omnibus Act 2020, contained changes to bankruptcy and insolvency laws, he said.

These include an increase in the debt threshold to apply for a bankruptcy notice from $5000 to $20,000 and making it harder for one party to bankrupt another, as well as an extension of the time frame to respond to a bankruptcy notice from three weeks to six months.

Additionally, the temporary protection period procedure to prevent recovery action by unsecured creditors has also been extended from three weeks to six months.

“There have been far-reaching changes in these laws in anticipation that more people may be accessing bankruptcy proceedings,” Figot said.

“It will be up to accountants and financial advisers to say to clients if they have that look in their eye to raid super, to say ‘no’ and tell them to go bankrupt.

“You are giving them the good oil because unauthorised early access has all sorts of terrible implications and I won’t describe how thick the walls in prison will be.”

Last year the ATO flagged that illegal early release of superannuation remains an area of concern and it was checking that newly established SMSFs were not being created for that purpose, and it continues to prosecute early release promoters.

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