When a Trustee becomes insolvent or is declared bankrupt even under the laws of a foreign country, they are classified as a disqualified person. A disqualified person cannot act as a Trustee or a Director of the Corporate Trustee of an SMSF and they cannot appoint a Power of Attorney to continue managing the Fund on their behalf. When an SMSF Trustee becomes bankrupt, prompt action needs to be taken and the Trustee is faced with three options:
1. Removing yourself as a Trustee If you become a disqualified person you need to:
- Remove yourself as Trustee and inform the ATO immediately
- Transfer your superannuation interest out of the SMSF
When you have resigned as a Trustee, you must complete the Change of details for superannuation entities (NAT 3036) form (HERE) and send it to The ATO within 28 days of the change. If you are a Director of a Corporate Trustee, you may also have obligations to inform the Australian Securities & Investments Commission (ASIC). If by doing so the Fund no longer meets the definition of an SMSF, it may need to be restructured to meet the requirements of a regulated Super Fund or be wound up.
2. Structuring your SMSF
Effectively, your SMSF has six months after you resign as a Trustee to restructure itself so that it continues to meet the definition of an SMSF – generally, this will mean rolling your super out of the Fund as all Members must be Trustees. The other Trustees or Directors can:
- Rollover your benefits to another complying Super Fund
- Appoint an approved Trustee who has a licence from APRA (that is, become a small APRA fund)
- Wind up the Fund by rolling all Members’ benefits out of the Fund.
3. Seeking leave of the court to still be allowed to run the SMSF
In the recent case Macalister [2021] FCA 1455 (Macalister), the Court considered an application by Macalister, illustrating that an SMSF Member who is insolvent is allowed to apply to the Federal Court for leave to continue to act as the Director of the Corporate Trustee of the SMSF. In the recent case, Mr and Mrs Macalister set up an SMSF with a Corporate Trustee, Kircam Pty Ltd in 2007. Kircam Pty Ltd is a special purpose company and does not carry on any activity other than to act as an SMSF Trustee. The Macalisters had an insurance agency business in the UK where they incurred a debt. In 2020, the Macalisters were unable to satisfy the debt for the insurance business. Accordingly, on 21 December 2020 they were subsequently made bankrupt pursuant to sequestration orders made by a registrar of the Federal Court. The Macalisters sought court orders permitting them to continue to act as Directors of Kircam Pty Ltd to manage the SMSF. The court granted the application based on the significant facts below:
- Mr Macalister is 67 years old and Ms Macalister is 60 years old and they are the only Members of the SMSF.
- Kircam Pty Ltd acts solely as the Trustee of the SMSF.
- The Macalisters have no intention of managing any company apart from Kircam Pty Ltd.
- The SMSF assets are not in any way referable to, or derived from, the proceeds of the sale of insurance business.
For more details about the Macalister case, please see here.
If a Trustee of a Fund fails to resign once they have declared bankrupcty the Commissioner is allowed to prosecute the Trustee under the law as they would not be Complying with superannuation laws. The Trustee may face fines or even imprisonment. Bankruptcy statuses can be viewed online and costs around $46. For more details on Trustee roles and responsibilities, please see the ATO guidance on our website.