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Bankruptcy and Self-Managed Superannuation Funds 

An 'insolvent under administration' (which extends to any form of undischarged bankruptcy, whether in Australia or overseas) is automatically deemed to be a 'disqualified person' under the superannuation legislation.

A disqualified person must not act as trustee of an SMSF or act as a responsible officer of the corporate trustee of an SMSF. Further, where such a person is a trustee they must immediately inform the Australian Taxation Office that they have become a disqualified person. These requirements carry heavy penalties for their contravention, including imprisonment.

However, there is no immediate need to remove a bankrupt member as a member of the SMSF. This is because the superannuation legislation provides a six-month grace period for the SMSF to meet the trustee/director/member requirements. This will usually give the SMSF some time to make arrangements in relation to the superannuation interests of the bankrupt member and will avoid disadvantaging any other members of the SMSF. However, as a bankruptcy normally lasts for at least three years, action to remove the bankrupt member from the fund will need to be taken within the grace period.

The Federal Court of Australia has the ability to make an order that a person is not a disqualified person for the purposes of being a trustee of a self-managed superannuation fund. If such an order is obtained within the six month grace period, then the bankrupt may resume their role as trustee and it will be unnecessary to re-arrange assets of the fund as a result of the bankruptcy of a trustee.

Hardship upon other members of the fund may well provide a persuasive reason for the Federal Court of Australia to make such an order.

If such a situation arises or becomes likely, you should seek specialist legal advice.

Greg Finlayson can provide advice and assistance on updating your trust deed or making an application to the Federal Court of Australia.