When a trustee goes bankrupt…

When a trustee goes bankrupt…


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. This means all members are connected and held accountable for one another. If one member enters bankruptcy, they will be categorised by the ATO as a “disqualified person”, meaning they can no longer act as a trustee of the SMSF.

Where a disqualified person continues to act as an SMSF trustee or director, they will be committing an offence that is subject to criminal and civil penalties. 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).

Other members 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.
  • Transfering the bankrupt’s balance to a managed fund.
  • Deciding whether they want to remain as a single member SMSF, or rollover 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.

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If you believe the matters discussed above are relevant to your business, please contact Darren Smith of our office to discuss further.


Darren is a Chartered Accountant with extensive experience, including working in the big 4 and medium sized firms before becoming a partner of a city based firm in 2000.

He has gained much experience and has extensive knowledge in providing business and taxation advice, superannuation planning, negotiation of sales and acquisitions of businesses and property development. His client base covers a wide range of industry groups.

Darren works with business owners to grow their businesses and create personal wealth within and outside of their business.


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