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Bankruptcy Could Impact Your SMSF, Here’s How

Australia’s SMSF sector has experienced tremendous growth over the past decade, with a vast majority of funds now being set up with two members, usually a husband and wife or de facto couple.

While sharing an SMSF has become a popular option amongst couples, 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. Ultimately, this has ramifications further down the line since all members are connected and held accountable for one another. Consequently, if one member enters bankruptcy, that will also mean one of the trustees has entered bankruptcy.

In addition, the laws governing SMSFs also state a “disqualified person” cannot act as trustee of the SMSF.

Where a disqualified person continues to act as an SMSF trustee or director, the fund may lose concessional tax status as it will be considered to be non-compliant. In addition, this may trigger a significant tax liability where the previous tax concessions are “clawed” back.

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)

If one member of an SMSF enters bankruptcy, they must resign as trustee as soon as possible. The other member 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
  • transferring the bankrupt’s balance to a managed fund
  • considering whether they want to remain as a single member SMSF, or roll over 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.

If you’re someone who often finds it difficult to make large lump sum payments for goods or services, you may want to consider looking into “Buy Now Pay Later” services.

Buy now pay later essentially means that, rather than paying in a full lump sum payment for a product or services rendered, there may be an option to pay through instalments of a certain amount over a set period to make the sum of the full amount in total. This method should allow you to pay in full for the product or service without overly straining your finances – you pay back what you can, as agreed upon when you begin the buy now pay later service.

Some popular buy now pay later services include Afterpay, Zip Pay, Brightepay, and some credit card networks such as  Mastercard and Visa, can offer buy now pay later arrangements.

Though it can be a convenient, immediate solution, it may be challenging to juggle the necessary repayments with other financial commitments. It’s not always the most appropriate method for people, and you should bear in mind your situation and ability in paying back the amounts. 

Before you sign up, keep in mind: 

  • It becomes easier to overspend with buy now pay later services, so know your limits on what you can and can’t afford.
  • You will be charged fees and costs to use the service, which can add up to a princely sum in and of itself.
  • Keeping track of your payments can be tricky if you’ve signed up for multiple services.
  • It could affect your loan applications for a car or mortgage as lenders consider buy now pay later spending just as much as your credit score.
  • Late repayments can appear on your credit report, which affects your ability to borrow money in the future.
  • Layby can be a cheaper alternative to buy now pay later, with no account-keeping or late fees to consider

If you are someone who could make use of BNPL services, you may wish to:

  • Ensure that when using the BNPL service, you stick to a set limit on what you spend so that you can comfortably pay it back later. 
  • Aim only to have one BNPL account at a time to manage payments through, rather than confuse yourself with multiple payments across different providers.
  • Always budget for bills, loan payments and BNPL payments, and 
  • Rather than use your credit card for payments to your BNPL account, consider linking to your debit account instead.

If you would like assistance in planning your financial future, help in managing your budget or some friendly advice, see us for a chat about what we can do for you.

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John Briggs

Jane Noller has been my accountant for the last 15 plus years. I can testify to Jane’s professionalism and expeditious manner in dealing with the day to day issues that surrounds our business accounting.

John Briggs

Registered Building Certifier