Quick action on bankruptcy issues critical for SMSFs, says technical expert

One of the most common situations where this can happen is where a member of the fund loses legal capacity or dies.

“An example would be a fund with a single member/trustee who has not appointed a legal personal representative or someone who has died,” said Mr Colley.

Another situation where this can occur is where the members and trustees of the fund are going through a divorce, he said.

“In a divorce situation, the splitting of assets as part of the drafting of the agreement can lead to delays in making fund investments and lead to compliance issues. This may result in one member or trustee stonewalling the fund’s operation to the detriment of the whole fund,” he explained.

The insolvency or bankruptcy of a member can also bring the SMSF to a standstill due to other events in their life, he said.

Where a member has become bankrupt, it is vital to understand the implications of this for the administration of the SMSF, said Mr Colley.

“The bankrupt needs to act as soon as declared bankrupt to resign as trustee and roll over their benefit to an APRA fund or have the SMSF converted to a small APRA fund and have an approved trustee appointed,” he cautioned.

“The reason is to ensure the SMSF retains its compliance status and, if required, any replacement trustee is appointed within the required six months.”

Often, SMSF clients aren’t aware of the six-month leeway or don’t understand it, he said.

“In some situations, the issues may not be recognised until the client lodges information with their accountant, administrator or other professional. This may be well after the six months has been exhausted and could be a long time after the end of the relevant financial year,” he warned.

“The trick is to get something done as soon as possible rather than when the documents are provided to the fund’s accountant or an administrator.”

Mr Colley said that an SMSF that is ineffective for any number of reasons could lead to many compliance issues.

“This can, for example, cause the fund to no longer be classified as an SMSF under the SIS Act or result in problems arising with trustee legislation or implications inherent in the trust deed,” he said.