Undischarged Bankrupt as trustee of SMSF - Not possible? Think again


In a recent case in the Supreme Court of Western Australia an undischarged bankrupt SMSF member has successfully applied for leave to act as a director of the corporate trustee of his SMSF. The bankrupt was one of two members of the fund, along with his former spouse.

After considering that the company as trustee of the fund had a very limited role (really?) and there was little or no prospect of it being a trading corporation (due to the conditions imposed by ASIC including that the company must not engage in any trading activity in any capacity other than as trustee of the SMSF), the court exercised its power under the Corporations Act to allow the disqualified member to act as a director of the corporate trustee.   

At first glance this might seem to be contrary to the general position that a bankrupt SMSF member cannot keep his SMSF running in compliance with the superannuation laws.

Although an interesting case, the decision should not be considered as a complete solution to the superannuation compliance issues that arise when a member becomes bankrupt. It is important to note that the superannuation laws provide another layer of disqualification that apply to SMSF trustees (and directors of corporate trustees).

Let’s consider an example. John and Mary were directors of JM Pty Ltd, the corporate trustee of their SMSF, and John became bankrupt after his business failed due to severe competition in the market.

In this situation, John becomes disqualified from acting as a director of any Australian company under the Corporations Act. What’s also important is that the SIS Act also disqualifies John from acting as an SMSF trustee (or director of a company which acts as the trustee of an SMSF).  

This means that even if John successfully applied to the Court to waive the automatic disqualification under the Corporations Act, this would not necessarily rectify his disqualification under the SIS Act.

As a potential consequence, the Commissioner may initiate proceedings to prosecute John which may result in fines or imprisonment. Further, the Commissioner may determine the fund non-compliant which will have adverse tax implications.

A conservative approach would be that John resign as a director of the company and also exit the SMSF as a member within 6 months. His balance in the SMSF should 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.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.