A superannuation lawyer has confirmed there is a legal restriction preventing individuals who have been declared bankrupt to hold office as an SMSF trustee and has outlined the steps required to be taken when a person finds themselves in this situation.
To this end, SuperCentral superannuation special counsel Michael Hallinan pointed out these rules apply to people who have been declared bankrupt in Australia and even in overseas jurisdictions.
To illustrate the steps a person should follow should they be declared bankrupt, Hallinan used the example of John, who is an individual trustee of an SMSF who found himself in this position.
“John should immediately retire as a trustee and notify the 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,” he noted.
He pointed out pleading ignorance as to not taking any action after being declared bankrupt would not be an effective defence in the eyes of the ATO as John would have signed the trustee declaration when he established the SMSF.
In addition, he stipulated John must also exit the fund as a member within six months after being declared bankrupt to comply with the requirement all members must be trustees or a director 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,” he indicated.
“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.”
Further, he acknowledged the superannuation laws prevent any appointed representatives from acting on behalf of the trustee who has been declared bankrupt, including any enduring power of attorney in place.
“It may be that statistically only a small number of SMSF members may ever be in the situation similar to John,” he recognised.
“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.”
