Question: I have been running my own small business for about 10 years. Everything was going really well until I fell for an online scam. Now I have a serious cash-flow problem. I was also convinced to invest in a tree farming scheme which went bust. My accountant tells me that the business won’t earn enough money to repay my debts in time. Even worse, my bank is threatening to bankrupt me if I don’t come up with the money. I have a SMSF, of which I am a director of the corporate trustee. Can the bank, or any other creditors, get at my super?

Platinum Member, Gold Coast, QLD

Answer: Sadly you are not alone. I have handled many tales of woe, where desperate clients are scrambling to fix things before bankruptcy occurs.

The biggest problem for people in your position is whether your SMSF remains a complying superfund after you go bankrupt.

In a recent case in the Federal Court, the Australian Taxation Office (ATO) successfully obtained an interim freezing order over some of the SMSF’s assets. In FCT v Interhealth Energies Pty Ltd, the ATO relied on the powers in s 313 SIS Act to freeze the assets.

The ATO froze the SMSF’s investment in a related unit trust which holds property development assets.

How does this case relate to the bankruptcy of an SMSF member?

The freezing order obtained by the ATO is only an interim order. That means, it is only in place until the Federal Court hands down a decision in the substantive proceedings.

In this case, the substantive proceedings involve the ATO starting proceedings to force the SMSF trustee to comply with an enforceable undertaking. The undertaking is given under s 262A SIS Act and is for the SMSF trustee to:

• call in any unpaid entitlements from the SMSF’s investment in a unit trust; and
• pay to the bankrupt member his superannuation benefits.

Of the SMSF’s 2 members, one is bankrupt and has not been a director of the SMSF’s corporate trustee for many years. That fact alone could make the SMSF non-complying under the SIS Act.

Depending upon whether or not the SMSF is a regulated superannuation fund, the Court noted that the interest which the bankrupt member has in the SMSF could form part of the property divisible amongst his creditors under s 116(2)(d)(iii)(A) Bankruptcy Act 1966.

The Court decided that the SMSF trustee and the trustees of the related unit trusts be prevented from dealing with the frozen assets in the interim. The Court said it did so to preserve the efficacy of whatever orders the Court may make in the future regarding the availability of the bankrupt member’s benefits.

Even worse, the Court ordered that the SMSF trustee was not allowed to be indemnified from the assets of the SMSF for the legal fees incurred by the trustee to date.

How do you avoid your SMSF becoming a non-complying fund when you go bankrupt?

Until relatively recently, you could not give away your role as trustee of your SMSF. Therefore when you:

• went overseas for an extended period of time;
• lost mental capacity;
• simply couldn’t be bothered acting as Trustee anymore; or
• went bankrupt

all your SMSF assets were liquidated (or transferred) and put into a retail fund. Or, you appointed an APRA approved trustee. Either way, you lose control of your own destiny.

Usually, a member has to be:

• a trustee; or
• a director of the corporate trustee

otherwise you breach - section 17A SIS. Section 17A(3) allows an exception:

• a legal personal representative
• who holds a special type of enduring power of attorney
• granted by a member
• may be a trustee of the SMSF (or a director of the corporate trustee of the SMSF)

The SMSF power of attorney allows your fund to remain a complying fund in circumstances where it would ordinarily fall foul of the SIS Act. However, due to section 120(1)(b) SIS Act as soon as you go bankrupt these special types of POAs stop working. At that time you need to appoint an APRA approved trustee or wind up your SMSF and tip the assets into a commercial superannuation fund.

Our Platinum Members get a New Year’s gift – exclusive access to our special knowledge of SMSF powers of attorney.

While a bankrupt's interest in a superannuation fund is generally protected from your creditors (subject to certain clawback provisions), that is not always the case. The Interhealth Energies case highlights the difficulty that a bankrupt member faces in maintaining those assets in the superannuation environment.

If a bankrupt has attained preservation age and is forced to receive a superannuation benefit, those assets could quickly become divisible among creditors. Therefore, a bankrupt member of a superannuation fund will need to consider strategies to maintain any benefits in the superannuation environment.

Must I also make the new patsy (oops), trustee a member of my SMSF?

Strangely, the ATO does not require that the donee (the person holding the special enduring Power of Attorney) be a member.

How do I handover my role as Trustee of my SMSF?

Only instruct a specialist law firm such as Civic Legal to:

1. Set up the Special Enduring Power of Attorney with the required restrictions and extra express powers to comply with SIS Act.
2. Update the Self Managed Superannuation Fund deed to allow the Special EPA to replace the human trustee or corporate trustee. And then change the trustee or directors as required for the deed. (You change the director yourself if there is a corporate trustee).
3. Prepare a Deed of Control and Management between the Complying Manager, old Trustee and member.
4. Prepare a Deed of Indemnity to protect the incoming Complying Manager.
5. Comply with the local State rules.

To instruct Civic Legal to prepare the SMSF Power of Attorney, email these documents to me at Brett.Davies@civiclegal.com.au:

1. Self Managed Super Fund Deed and all variations (if any)
2. Latest financials
3. Letter of advice setting out the full details of the current members, trustees and the new Complying Manager  

• Self Managed Superannuation Fund Deed
• Investment Strategy for Self Managed Super
• SMSF - Deed Update
• Investment Strategy for Self Managed Super 10/11

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