CURRENT ISSUES FOR A
LIQUIDATOR/BANKRUPTCY
TRUSTEE IN DEALING WITH SMSF’
SROBYN DUGGAN AND JOE HANSELL FERRIER HODGSON
Overview of SMSF industry
• SMSFs account for 99% of the total number of funds and 30% of the $1.9 trillion total superannuation assets in Australia
• In the five years to 30 June 2014, SMSF assets grew by $183.2 billion or 49%
600,000 700,000 800,000 900,000 1,000,000 1,100,000 350,000 400,000 450,000 500,000 550,000
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
# o f m e m b e rs # o f SM Sf s
Overview of SMSF industry
• For practitioners SMSFs in individual and corporate structures are going become more and more prevalent
• At 30 June 2014 77% of all SMSFs had an individual Trustee, rather than a Corporate Trustee
• Of newly registered SMSFs in 2014 92% had an individual Trustee
About SMSFs
To be a SMSF it must:
1. Have less than 4 members
2. Each individual Trustee or each Director of the Corporate Trustee must be a member of the fund
3. No member can be an employee of another member of the fund
4. No Trustee or Director of the Corporate Trustee can receive any remuneration from the fund
About SMSFs
• The ATO is responsible for the regulation of SMSFs. • APRA is responsible for all other super funds
• The ATO has a Super Fund Lookup (SFL) site which discloses publically available information about SMSFs
• SFL can be used to query an SMSFs status and whether the SMSF is entitled to receive contributions and rollovers
• If a SMSF is not on the SFL there should be concern as to its complying status
Issues in bankruptcy/liquidation
Bankruptcy
• A bankrupt’s interest in a regulated superannuation fund is generally protected from creditors
• Exceptions:
– If the contributions were made to the fund prior to
bankruptcy with the intention to defeat creditors s128B; – The fund is non-complying
– The bankrupt is in receipt of pension income from the fund which is assessable (s139L) and is over the threshold
amount
N.B. a lump sum payment e.g. for severe financial hardship is protected, if assessed and approved by the Trustee
Issues in bankruptcy/liquidation
Bankruptcy (cont’d)
• Bankruptcy trustee can adopt the following methods to recover void superannuation payments:
– Request the Official Receiver to issue a notice freezing a super account (s128E)
– Write a letter of demand to the SMSF Trustee requesting repayment pursuant to s128B or s128C
– Request the Official Receiver to issue a notice under s139ZQ requiring repayment of the void contribution
– Apply to Court (s128B or s128C) seeking a s139ZU order relating to rolled-over superannuation interests
Issues in bankruptcy/liquidation
Liquidation
• Liquidators of companies that act as Corporate Trustees for a SMSF need to consider:
– the Trust documents to understand rights and powers of the Trustee
– whether the office of Trustee is immediately vacated on the appointment of a Liquidator and whether the Liquidator acts as a bare Trustee with legal ownership of Trust property
only
Issues in bankruptcy/liquidation
Common issues
• If a Director of a Corporate Trustee or an individual Trustee becomes bankrupt they will need to be replaced immediately • There is a 6 month grace period in dealing with a bankrupt’s
entitlements in the SMSF. Options include: – Roll over benefits
– Appoint replacement Trustee – Wind up the fund
• Failure to do so will result in non-complying status for the SMSF
N.B. The ATO has flagged a crackdown on non-complying funds rumoured to be over 10,000
Issues in bankruptcy/liquidation
• Bankruptcy Trustees, Liquidators etc. should examine whether the property is in fact held on trust
• There have been issues with establishment of SMSFs which can render them invalid.
• In addition the SIS Act is quite specific on acceptable
investments within the fund. As Trustee investments must satisfy
– Sole purpose test – Ownership test
– Restrictions on certain type of investments i.e. arms lengths transactions, in-house assets, collectables, borrowings and carrying on a business
Case study 1 -
Australasian Annuities Pty Ltd
(
AA
)[2015] VSCA 9
(AA 2015)
The Facts
• AA carried on a financial planning business
• AA was also the Trustee of a family trust and in that capacity acted as a service entity, providing management, administration and accommodation to another entity which held an AFSL and received broker commissions
• AA borrowed $2.5m from Macquarie Bank in May 2007
• Sole Director of AA was a financial planner and had a SMSF of which he and his wife and sons were the members
Case study 1 -
AA 2015 (cont’d)
The Facts
• AA’s performance deteriorated and receivers and managers were appointed on 29 June 2009 by Macquarie Bank pursuant to its securities
• The receivers brought a claim in AA’s name against the SMSF and the financial planner, to recover the funds advanced from AA to the SMSF
• As the financial planner declared bankruptcy, the claim proceeded solely against the SMSF Trustee
• AA’s first case in the VSC failed. AA 2015 was the result of AA’s appeal, which was based on two main arguments
Argument 1 – The SMSF was a ‘volunteer’
• The SMSF had given no consideration and as such the Trustee should be compelled to make restitution by repaying the money • Majority of the VSC held that the SMSF did provide valuable
consideration in exchange for contributions and as such AA’s argument failed
Argument 2 – Knowing receipt
• AA’s argument was that the SMSF must return the money on the satisfaction of two elements:
1. The SMSF had received property that had been
misapplied pursuant to a breach of fiduciary duty/trust; and 2. The SMSF had knowledge of the breach
• In dealing with the first element it was clear the sole Director of AA was subject to fiduciary obligations and was in breach in borrowing money solely for the benefit of himself and his wife
Argument 2 – Knowing receipt
• In addressing the second element re knowing receipt of property subject to a breach of duty/trust it was noted the SMSF Corporate Trustee had four Directors of which the financial planner was one
• The financial planner was the most active and was deemed to be the ‘directing mind of the SMSF Trustee’ and as such the Court held that the SMSF had knowledge the money was received in breach of a fiduciary duty
• As a result the SMSF was liable to pay back the money to the Receivers of AA
Conclusion
• AA 2015 demonstrates that it is important that SMSF’s provide valuable consideration in return for contributions. This will
assist in defeating claims attempting to claw back member contributions
• However the case serves as a reminder to Directors and Trustees of the duties they owe to a corporation to act in the corporation’s best interests
• It also more importantly demonstrates recovery avenues for liquidators/receivers with respect to misappropriation of funds to related party SMSF’s
Case study 2
• Husband and wife are joint Trustees of their SMSF which holds property from which they carry on their business
• Business fails with the property no longer producing income and debt associated with the property can no longer be
serviced
• Both Trustees become bankrupt
• As a “disqualified person” bankrupts cannot act as a Trustee of a SMSF…severe penalties apply
• Once a Trustee resigns it will no longer meet the definitions of a SMSF, however will remain a SMSF until appointment of a
Case study 2 (cont’d)
• 6 month grace period allows time for Trustees to restructure the fund to maintain the SMSF status, roll over benefits to a
complying fund or wind up the fund
• A non-complying fund may result in loss of tax concessions and potential tax liabilities
• More importantly, a bankrupt’s interest in a SMSF will cease to be protected from creditors on the basis it is no longer a
Case study 3
• A number of SMSF investors discouraged by the low-yields provided by Australian fixed-interest investments are turning to provide loans to unrelated businesses, effectively becoming lenders of last resort
• In a recent case Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (In Liq) [2014] FCA 1034 a SMSF granted a $250,000 loan to an unrelated company which agreed to
provide security over its assets
• Five months later the company went into VA and the SMSF looked to recoup $348,713 from the company
Case study 3 (cont’d)
• The Federal Court ruled the SMSF was an unsecured creditor as the SMSF failed to register its “security interest” on the
PPSR within the required timeframe
• This case serves as a warning to SMSF Trustees to: – Not invest in high-risk, high-yield investments – Familiarise themselves with relevant legislation
– Manage the level of risk in the fund commensurate with the skill and capability of the Trustee
• It also demonstrates the need for liquidators to make the proper enquiries into the security arrangements between companies and SMSFs
CURRENT ISSUES FOR A
LIQUIDATOR/BANKRUPTCY
TRUSTEE IN DEALING WITH SMSF
SROBYN DUGGAN AND JOE HANSELL FERRIER HODGSON
