Developments in SMSFs and bankruptcy

By Bryce Figot, Cassandra Hurley on 13/05/2026 in SMSF cases & decisions, SMSF compliance, SMSF strategy, Trustee education

The recent decision of Carrello [2026] FCA 468 illustrates various options in respect of SMSFs and bankruptcy.

Carrello contrasts interestingly to Hunt [2026] FCA 389, which is also a recent decision.

Carello

Mr and Mrs Jones were the trustees of an SMSF. At all relevant times, a principal asset of the SMSF was certain real estate.

In December 2023, Mr Jones died. This left Mrs Jones as the sole trustee of the SMSF.

In December 2024, Mr Carrello was appointed as trustee in bankruptcy of Mrs Jones’s bankrupt estate. In January 2025, Mr Carrello was appointed trustee in bankruptcy of Mr Jones’ deceased estate.

Mrs Jones wished for the SMSF to be wound up. She did not want to continue running an SMSF. She wanted her share to be rolled into a retail superannuation fund. However, no person had the power to lawfully liquidate the assets and wind up the SMSF. This is because Mrs Jones was an undischarged bankrupt and thus the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) prohibits her from acting as a trustee.

Mr Carrello applied to be appointed the manager of the assets of the SMSF with power to realise them and wind up the SMSF.

However, the court refused the application. The court refused the application for various reasons. The court noted ‘a lack of candour as to the ultimate use contemplated for half of the Superannuation Fund’. The court appeared concerned that what was in effect being applied for was for Mr Carrello to give preference to claims to the Superannuation Fund to creditors of Mr Jones’ bankrupt estate.

This begs question: Is there another way?

The court noted that a possible solution to these problems might have been for Mrs Jones to apply for leave under s 126J of the SISA to manage the SMSF for the purpose of winding up it. It is not clear why this avenue was not pursued, despite a specific inquiry from the court as to this matter. Indeed, Mrs Jones said in an affidavit that ‘I have received legal advice about my obligations and options in relation to the Fund.’ The court observed that this does not say that it is independent legal advice and does not say who provided it, or what the advice was. Hence, as the court noted that mentioned earlier, it remains unclear why the option of applying under s 126J of the SISA has not been pursued.

Accordingly, after reading Carrello, one wonders what might have occur had an application been made under s 126J. Hunt provides guidance.

Hunt

In Hunt the applicant became bankrupt in November 2025, with significant liabilities owed to the ATO. Prior to this, he was the sole director and shareholder of a company acting as trustee of his SMSF. The applicant was currently the sole member of the SMSF, which held approximately $770,000 in assets and had consistently maintained complying status.

Upon bankruptcy, the applicant was automatically disqualified from:

managing corporations; and
acting as trustee of a superannuation entity.

Without relief, the fund would cease to satisfy the definition of an SMSF within six months. If so, this would expose it to the risk of becoming non-complying and suffering adverse tax consequences.

The fund had significant (over 10%) investments in a listed company that the sole member had co-founded and continued to consult for. Due to the conditions of the applicant’s consulting arrangement with the company, he was restricted in how he could sell these shares.

The Court granted relief under:

s 206G of the Corporations Act 2001 (Cth), permitting the applicant to manage the corporate trustee despite being a bankrupt; and
s 126J of the SISA, providing that the applicant not be treated as a disqualified person.

The relief was subject to strict conditions, including that:

the company act only as trustee of the SMSF; and
the applicant not act in relation to any other superannuation entity.

The Court emphasised that relief of this kind is discretionary. It must be exercised with regard to the protective purpose of the legislation.

In determining whether to grant relief, the Court considered factors such as:

the nature of the bankruptcy;
the applicant’s character and conduct;
the structure of the company; and
the potential impact on third parties.

Several considerations weighed in favour of the applicant. Importantly, the bankruptcy did not involve dishonesty or misconduct. (The applicant’s bankruptcy was due to a reassessment by the ATO and then failing to comply with the resultant payment plan agreement. However, the Court was confident that the applicant had not ‘demonstrated any dishonesty in his dealings with the ATO’ and that his inability to comply with the payment plan was due to a ‘sharp decline in the value of [his] assets … [and] due to adverse market conditions’.)

There was no suggestion of impropriety in his prior management of the fund. The SMSF was also relatively low risk — it had no employees or external creditors. The applicant was effectively the only person with a financial interest in the SMSF, and so the only member that could suffer by his management of it.

The Court also accepted that there were no practical alternatives — as the typical alternative expected when a member does not want to liquidate their entire balance and roll into a larger APRA regulated fund was not available to this particular member due to the restrictive conditions associated with the shares in the company of which he was the co-founder. Further, if the member was forced to sell the fund’s assets to a third party (and then roll his balance into an APRA regulated fund), the court noted that this liquidation ‘likely to be detrimental to the interests of third parties, namely that of the other shareholders.’ In connection with this point, the Court, interestingly, also considered that allowing the shares to continue to be held in the SMSF, without the Court orders sought being granted, would result in ‘significant tax consequences’ for the member.

Given all of the unique circumstances, permitting the applicant to continue in a limited capacity (and not sell the shares) was considered consistent with the statutory objectives. This was despite comments last year in Wake, in the matter of Wake (Bankrupt) [2025] FCA 1481, where Dessmann; Re Dessmann [2023] FCA 1019 was quoted:

Consistent with the principles that have developed in relation to s 206G of the Corporations Act, the applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition in the Act [emphasis added]

Conclusion

Hunt and Carrello show that where trustees/members/directors in respect of an SMSF became bankrupt, one should definitely consider a prompt and fully candid application to the Federal Court for permission to nevertheless run an SMSF (even if it is only for a limited purpose of liquidating and winding it up).

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