Bankruptcy ruling a warning for SMSFs

In this case, the sole member of an SMSF was an undischarged bankrupt and made an application under the Superannuation Industry (Supervision) Act 1993 (SIS Act) that he should not be treated as a disqualified person – and therefore be eligible to be appointed trustee of his SMSF.

The court ruled against him, stating in its ruling that “the superannuation system in Australia is not purely concerned with private interests – in addition to providing for adequate levels of income in retirement for individuals, it is also directed towards meeting the public policy challenges presented by Australia’s ageing population”.

Additionally, the court raised the issue that the “object of the SIS Act is to make provision for the prudent management and supervision of superannuation entities”.

“The superannuation system is designed to confer concessional taxation treatment on superannuation funds that comply with the regulatory system,” the ruling continued.

“While here the SMSF was a sole member fund, the matter could not be determined solely based on the wishes of that member. Rather, regard had to be had to the interests of third parties and to the purpose of the SIS Act. That is, the discretion of the court must be exercised in light of the statutory scheme.”

Evidence before the court showed the SMSF was no longer a complying fund when the member ceased to be a director in March 2021.

“Furthermore, there was no evidence that allowing the application would see the SMSF managed prudently and in compliance with its obligations under the SIS Act,” it said.

“Specifically, the court confirmed that the member’s suggestion that he would ‘engage a qualified accountant and auditor’ despite being unaware of the scope of or status of an audit by the ATO was concerning, particularly given the member and the SMSF appeared to be in a parlous financial situation.”

Mr Figot said unlike another landmark case along the same lines – Frigger, in the matter of an application by Frigger [2019] FCA 1730 – who were successful in their own application, he hypothesised that having existing creditors in this case tipped the scales.

“This may have formed an important reason for the decision,” he said.

“I suspect that if you go bankrupt and have an SMSF and want to continue running it, it will be extremely difficult if the fund has existing or potential creditors (other than the minor ‘usual’ sorts of creditors) or an LRBA mortgagee has taken possession of the sole asset of the fund.”

Matthew Burgess, director of View Legal, said in this case the court also flagged that given the ATO was engaged in a review of the SMSF and was provided with information that indicated to it that there may be breaches of the superannuation rules, the failure by the ATO to intervene in the proceedings was “difficult to understand and reconcile with the conduct that might be expected of a model regulator”.

“Arguably the ATO’s failure to be involved in the case was particularly concerning given that it left the court ‘in an unsatisfactory position in proceedings that (had) no contradictor and in which the applicant (was) self-represented,’” he said.

“This is the third case of this ilk where people have had an SMSF and go bankrupt and ask the court that they still be able to run their fund,” Mr Figot said.

One of those was Macalister, in the matter of an application by Macalister [2021] FCA 1455, where the directors of a corporate trustee of an SMSF became bankrupt.

Mr Burgess said this meant they were automatically disqualified from:

(a) Managing a corporation (see section 206B(3) of the Corporations Act 2001) and

(b) Being eligible persons for the purpose of Part 15 of the SIS Act.

“Ultimately in this case the court was comfortable that the SMSF members would comply with their obligations under the Corporations Act and the SIS Act, as they had done so prior to their disqualification,” he said.

“Therefore, rather than having to wind up the SMSF and roll their benefits into an industry fund, or become a small APRA fund, the SMSF was able to continue in the same manner as it had prior to the members becoming bankrupt.

“Importantly, under both the Corporations Act (section 206G) and the SIS Act (section 126J(1)(b)) an otherwise disqualified person can apply to the court for permission to act.

“The courts have confirmed that the main considerations in allowing an otherwise disqualified director to act are the interests of third parties; the shareholders, creditors and employees of any relevant company, and the public at large.”

Mr Figot said each case that goes before the courts offers more information about what the likely outcome of SMSFs could be when facing similar circumstances.

“We learn more each time,” he said.

“But the takeaway from this case is to keep the super fund nice and clean.

“If this fund had not had its own creditors, or been in its financial state, this ruling might have been viewed differently and more along the lines of the Frigger decision.

“If there is a bankruptcy order there are not many options open to an SMSF. They can either appoint an APRA-licensed trustee or they can liquidate the fund or roll over to a big APRA fund.

“But if the fund has a chunky asset, those two options may not be available.”