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COVID, new bankruptcy rules and the domino effect that can impact your SMSF

Nov 20, 2020, 14:18 PM

Prior to 2020, the rules were fairly straight forward, if you were declared bankrupt you could no longer trade in your industry. 

But that has all changed because of COVID-19 with the Federal Government adopting US-style bankruptcy legislation that allows small businesses to trade while insolvent.

It means while there may not be direct changes to the way an SMSF is impacted by the collapse of a business, there could be indirect ways that could have major ramifications on Australian SMSF funds.


What happens when a member of an SMSF is faced with bankruptcy?

This part of the legislation has not changed. If a member is declared bankrupt they need to move their superannuation benefit to another fund or sell their assets within six months of being declared bankrupt as they are a disqualified person under the SIS legislation. 

These members are also not allowed to appoint a legal representative to act in their place while they are disqualified. They need to remain out of the SMSF until they have been fully discharged, a process which usually takes about three years. 

These members also need to resign as a trustee or as director of the trustee company, which is all covered under the Superannuation Industry Supervision Act 1993 SIS Act.


What are the new changes to bankruptcy legislation?

COVID-19 hit many individuals and business owners hard in 2020 due to forced closures and lost earnings. Bankruptcies in Australia eased to 397 in January but then spiked to 667 in February and 683 in March as the impacts of lockdowns and other measures to control and contain COVID-19 impacted many industries.

The Federal Government rolled out a two-stage approach to bringing its budget back to surplus in September and stage one of that plan includes throwing a lifeline to small businesses that are at risk of collapse because of the global pandemic.

The biggest change is the ability of these business owners to continue to trade while insolvent, which borrows heavily from the United States' Chapter 11 bankruptcy provisions.


How will these changes impact SMSF funds and their members?

On the surface, it would appear this legislation does not impact SMSFs because any member who is bankrupt has to leave the fund anyway, even if they can continue to trade while insolvent.

Instead, the impacts will be less direct and quite challenging for SMSFs to handle. For example, according to the Australian Financial Security Authority, the most common industries to report personal insolvencies were construction, retail trade and accommodation and food services.

An SMSF could own a property that is currently being rented by someone in those industries who are allowed to continue trading but may be struggling to pay the rent. This could cause a domino effect where there are cash flow delays which could in turn impact the ability of the fund to pay pensions.

This could lead to breaches of the pension standards or a firesale of assets just to pay pensions as legally required. It will require a watchful eye on property assets to ensure those rental payments do continue to roll in - and the dominos are not allowed to fall.

If you would like to learn more about the impacts of Australia’s new bankruptcy rules the expert team at SuperConcepts is able to help. Phone our team on 1300 023 170 to find out more.