More clarity for SMSFs with a bankrupt member

Background

Traditionally, an SMSF with a bankrupt member had two options:

• Option 1 — the member had to roll over their benefits to an APRA fund; or

• Option 2 — the SMSF had to be converted to a small APRA fund.

However, a third option might exist. This third option emerged from two successful applications to the Federal Court in Frigger [2019] FCA 1730 (Frigger) and Macalister [2021] FCA 1455 (Macalister).

Both Frigger and Macalister involved bankrupt persons. In both Frigger and Macalister, they applied to remaining director of an SMSF corporate trustee. They made applications under s 126J of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) and s 206G(1) of Corporations Act 2001 (Cth) (CA).

For further information on Frigger and Macalister, refer to our previous article. See https://www.dbalawyers.com.au/smsf-compliance/new-option-for-smsfs-with-bankrupt-member/.

Dessmann [2023] FCA 1019 sheds further light on s 126J.

Facts of Dessmann

On 20 April 2015, the Alexandria Superannuation Fund was established, with Mr Dessmann as the sole member of the fund.

The trustee of the fund was and is Alexandria Pty Ltd. Until 29 March 2021, Mr Dessmann was the sole director of the fund. At that time, he resigned and appointed his son as director.

The principal asset of the fund was and is a single property.

On 29 April 2021, Mr Dessmann became bankrupt.

On 31 March 2022, Mr Dessmann’s former solicitor removed the appointment of Mr Dessmann’s son from the ASIC register and appointed himself as director.

On 1 August 2022, the solicitor ceased his appointment as director and caused a third party to be appointed director.

Mr Dessmann then sought leave of the court permitting him to act as director of Alexandria Pty Ltd. Mr Dessmann did so under s 126J of the SISA.

The Judgement

Hespe J first considered:

• ‘The Object of the SIS Act is to make provision for the prudent management and supervision of superannuation entities.’
• ‘Regard must be had to the interests of third parties and to the purpose of the SIS Act. The discretion of the Court is to be exercised in light of the statutory scheme.’

As in Frigger, the applicant was self-represented with no contradictor. However, Hespe J sought to distinguish Frigger on the following grounds:

• There are existing and potential creditors of the fund.
• There are current proceedings by a third party against the fund.
• The fund had already ceased to satisfy the definition of an SMSF. Hespe J identified this occurring upon the appointment of Mr Dessmann’s son as director.
• It is not clear that if application is allowed the fund would satisfy the requirements of a complying superannuation fund.

The court also relied upon concerns raised by the current director of the fund in the form of two affidavits. The affidavits noted that:

• Several years of audits of the fund as required by s 35D of SISA had not been completed.
• The former solicitor for Mr Dessmann holds security interests in the principal asset of the fund.
• The principal asset is subject to a mortgage. The mortgagee has taken possession of that asset and Mr Dessmann has confirmed it will be sold.
• The non-compliance of the fund was reported to the ATO. The fund is currently being audited by the ATO.

Mr Dessmann offered to engage an accountant if successful in his application. However, the court was concerned about his practical ability to ensure the fund’s compliance.

Mr Dessmann did not make an application under the related provision of the Corporations Act 2001 (Cth) (CA) (ie, under s 206G(1)). This would render a successful application under the SISA futile because the CA would still prohibit him from being a director.

Conclusions

A court application might be a viable option for an SMSF with a bankrupt member. However, Dessmann illustrates some of the issues that an applicant might need to contend with. Among other things, to maximise chances of success, the SMSF’s affairs should be completely ‘in order’ and ‘up to speed.’ Any of the following appear to decrease the chances of a successful application: unresolved ATO audits, outstanding annual returns and internal audits, significant creditors and having already failed the definition of SMSF.

Naturally, DBA Lawyers would be pleased to provide advice and assistance.

Related Articles:

• New option for SMSFs with bankrupt member
• What disqualifies you from having an SMSF?
• New case on superannuation, bankruptcy and death benefits
• Are you disqualified from having an SMSF?
• Good news for SMSFs and bankruptcy comes with a caution
• Super and bankruptcy: protecting your nest egg
• Disqualified status for SMSF trustees: lessons from a recent AAT decision
• ATO disqualifies an increasing number of SMSF trustees with adverse consequences
• SMSF trustees — disqualified due to dishonest conduct

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Bryce Figot ([email protected]) Special Counsel and Fraser Stead ([email protected]) Lawyer, DBA Lawyers

DBA LAWYERS

13 October 2023