Bankruptcy, Will I lose my Superannuation?

Bankruptcy in Australia can be involved and confusing. A question we usually get asked here over at Bankruptcy Advice Melbourne is 'what happens to my super if I apply for Bankruptcy'? The reply for most is straightforward, if your super is simply in a regulated fund or industry fund like Sunsuper or Host Plus then nothing 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, look at the increasing number of members of Self-Managed Super Funds ("SMSFs") over the last few 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 concerns Bankruptcy?

Remember Bankruptcy Advice Melbourne is not proposing this article is the entire story, if you have any questions feel free to get in touch with us on 1300 879 867. Whether or not you call us or another person it doesn't matter, just please don't walk into bankruptcy blind when it comes to your SMSF in truth we recommend you find 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 going up against bankruptcy, you will be identified as a 'disqualified person'. And a disqualified individual 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 will need to also be the individual trustees. The duty of trustee poses a lot of legal rules, and if you are in this role I would highly urge you to be familiar with them all-- for example the fact that you can not 'know or suspect' that one of you are bankrupt. So you can notice how an individual bankruptcy can be rather damaging to a SMSF and as you can imagine the process of Bankruptcy for a SMSF is rather convoluted.

How long do I have so as to restructure my SMSF Fund after I'm bankrupt?

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

For starters, the SMSF will have to be restructured. This means that you will have to consider your over-all structure and make sure it is meeting the basic conditions, including having a new trustee that is not dealing with issues with Bankruptcy. The Australian Tax office will offer you a 6 month 'grace period' to get this done before you face penalties. And consider, 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 continuously keeping the ATO informed of what is happening. This indicates you ought to let them know that you have a bankruptcy complication with your current trustee, that they are being removed as soon as possible know who the new trustee/director is. The Bankrupt will also need to inform the ATO using the form NAT 3036 (Found on the ATO website) and they need to also notify ASIC of their resignation.

Over 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 Bankruptcy Advice Melbourne for some free advice on 1300 879 867.

What if I have a single member fund?

If you are a single member fund, then you will have to appoint a new director, and it will then be their duty to oversee the sale and transfer of assets into a managed fund. If there are two or more members, than the bankrupt member will need to resign and the other member will remove the property and halve the proceeds. They would then want to decide if they choose to remain as a single member SMSF, or if they would like to roll it all into a managed fund. If both members are entering bankruptcy, then they would need to sell all assets immediately and transfer the liquid assets to the managed fund.

From that 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 currently facing this issue yourself, or with a partner in a SMSF, please seek financial advice to make certain you are satisfying the ATO requirements.

A simple solution ...

As I suggested earlier, a basic solution to your SMSF situation is to put your super back into a normal regulated managed fund before bankruptcy and save yourself all the headaches outlined above. Bankruptcy is never easy, but getting proper advice is the best first step. If you want to discuss your options further, contact us at Bankruptcy Advice Melbourne or visit our website: www.bankruptcy-advice.com.au/Melbourne.com.au or just give us a call on 1300 879 867.