When a trustee goes bankrupt…

SMSF members need to be aware of the rules that govern their fund, including what to do when one member becomes bankrupt.

A requirement of an SMSF is that each individual trustee of the SMSF must be a member of the SMSF. In the case of corporate trustees, every member must be a director. This means all members are connected and held accountable for one another. If one member enters bankruptcy, they will be categorised by the ATO as a “disqualified person”, meaning they can no longer act as a trustee of the SMSF.

Where a disqualified person continues to act as an SMSF trustee or director, they will be committing an offence that is subject to criminal and civil penalties. The ATO provides a six-month grace period to allow a restructure of the SMSF so that it either meets the basic conditions required or can be rolled over into an industry fund. During the six-month grace period, the ATO requires:

• The bankrupt to remove themselves as trustee.
• The bankrupt to inform the ATO in writing.
• To be notified within 28 days if there is a change in trustee.
• The bankrupt to notify ASIC of the resignation as a director (if the SMSF is run by a corporate trustee).

Other members will need to remove the bankrupt's balance from the SMSF before the grace period is over, this may involve:

• Selling any real estate or shares.
• Transfering the bankrupt's balance to a managed fund.
• Deciding whether they want to remain as a single member SMSF, or rollover their entitlements to a managed fund.

For members who enter bankruptcy, they must sell all assets for the market value available at the time and then transfer all of the liquid assets to a managed fund.