Bankruptcy, Will I lose my Superannuation?

Bankruptcy in Australia can be involved and perplexing. A question we typically get asked here over at Fresh Start Solutions Adelaide is 'what happens to my super if I apply for Bankruptcy'? The reply for most is simple, if your super is simply in a regulated fund or industry fund like Sunsuper or Host Plus then very little happens; your super is 100 % safe when it comes down to Bankruptcy.

What if I have a Self Managed Super Fund?

This is a growing concern, take into account the evolving number of members of Self-Managed Super Funds ("SMSFs") in recent years; the ATO tells us it has increased Australia-wide from 758,589 in 2009 to 1,011,689 in 2014. So what happens to these Superfunds when it comes down to Bankruptcy?

Remember Fresh Start Solutions Adelaide is not implying this short article is the entire story, if you have any questions feel free to call us on 1300 818 575. Whether or not you call us or someone else it doesn't matter, just please don't walk into bankruptcy blind when it comes to your SMSF indeed we advise you look for both legal and financial advice before proceeding with any of the actions proposed in this article.

What is a Disqualified Person?

First and foremost, if you are considering Bankruptcy, you can not be a part of a SMSF. Why? Because if you are confronting bankruptcy, you will be grouped as a 'disqualified person'. And a disqualified person cannot operate as an Individual Trustee. This poses a problem since usually most of the SMSFs are just 2 people, which means each of these members must also be the individual trustees. The duty of trustee presents a lot of legal rules, and if you are in this position I would highly urge you to get aware of them all-- for example the fact that you can not 'know or suspect' that one of you are bankrupt. So you can see how an individual bankruptcy can be quite destructive to a SMSF and as you can assume the process of Bankruptcy for a SMSF is rather convoluted.

How long do I have to restructure my SMSF Fund once I'm bankrupt?

So what develops if one of the members of an SMSF does enter Bankruptcy?

For starters, the SMSF will need to be restructured. This means that you will have to consider your extensive structure and ensure that it is meeting the basic conditions, involving having a new trustee that is not having issues with Bankruptcy. The Australian Tax office will supply you a 6 month 'grace period' to get this done before you face penalties. And keep in mind, sometimes the most ideal plan would be to simply roll the fund into an industry or corporate fund.

Beyond these large scale restructuring issues, there is a lot of paperwork to deal with too, and you need to be frequently keeping the ATO informed of what is happening. This suggests you will need to let them know that you have a bankruptcy problem with your current trustee, that they are being removed as soon as possible know who the new trustee/director is. The Bankrupt will also have to inform the ATO using the form NAT 3036 (Found on the ATO website) and they will need to also notify ASIC of their resignation.

Through that 6 month period you will need to remove the Bankrupt from the SMSF-- including their property and assets. Remember if you are not exactly sure call Fresh Start Solutions Adelaide for some free advice on 1300 818 575.

What if I have a single member fund?

If you are a single member fund, then you will need to appoint a new director, and it will then end up being their responsibility to oversee the sale and relocation of assets into a managed fund. If there are two or more members, than the bankrupt member will have to resign and the other member will clear away the property and halve the proceeds. They would then need to decide if they want to remain as a single member SMSF, or if they need to roll everything into a managed fund. If both members are entering bankruptcy, then they would definitely need to sell all assets promptly and move the liquid assets to the managed fund.

From this you can see how when it comes to Bankruptcy, even though one single member is running into issues, it can affect the very existence of an SMSF. If you are at the moment facing this problem yourself, or with a partner in a SMSF, please seek financial advice to make sure you are fulfilling the ATO requirements.

A simple solution ...

As I recommended earlier, a straightforward solution to your SMSF situation is to put your super back into a normal regulated managed fund prior to bankruptcy and save yourself all the headaches outlined above. Bankruptcy is never easy, but receiving proper advice is the best first step. If you want to discuss your possibilities further, give us a call at Fresh Start Solutions Adelaide or visit our website: www.freshstartsolutions.com.au/bankruptcy-Adelaide.com.au or just call us on 1300 818 575.