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Changes to insolvency laws mean SMSF directors may become disqualified

In early 2021, the Federal Government amended insolvency legislation to include a new debt restructuring process and a simplified liquidation process. It is available to small companies, and requires the appointment of a restructuring practitioner.

In December 2021, amendments were made to the Superannuation Industry (Supervision) Act (SIS Act) to reflect these changes, introducing a new category of disqualified persons.

This new category applies when a restructuring practitioner is appointed to a corporate trustee, and triggers the disqualification of the corporate trustee from managing a SMSF. This article outlines what the changes mean for new and existing SMSFs.

Cara Thompson, Maddocks Lawyers

What are the specific changes?

On 1 January 2021, two key elements of the Corporations Act were introduced ( Corporations Amendments) . They are as follows:

  • a new formal debt restructuring process for eligible small companies; and
  • a new simplified liquidation pathway for eligible small companies.

Of specific relevance to SMSFs is the formal debt restructuring process. This process was created with a view to enabling financially distressed but viable small businesses to restructure their debts so they can continue to trade. The process involves eligible companies (operating a small business) to work with restructuring practitioners to develop and implement a restructuring plan that is agreed with the company's creditors. The relevant sections of the Corporations Act specifically set out who can act as a restructuring practitioner and formalise the process of appointment.

On 8 December 2021, section 120(2)(ca) was inserted into the SIS Act that designated that a body corporate was disqualified from acting as a trustee if "a restructuring practitioner (within the meaning of the Corporations Act 2001) has been appointed in respect of the body".

What does this mean for existing funds?

If your SMSF has a corporate trustee, and a restructuring practitioner is appointed to that trustee, the company will no longer be able to act as the corporate trustee, as it is disqualified. This is so even though the stated goal of the Corporations Amendments is to assist financially distressed businesses to remain viable and continue trading.

A disqualified corporate trustee must notify the Australian Taxation Office of its disqualification as soon as practicable.

The disqualified corporate trustee has six months from the date the practitioner was appointed to either:

  • restructure the fund to meet the definition of an SMSF (i.e. by appointing a new corporate trustee whose members are directors);
  • appoint a RSE (registrable superannuation entity) licensee and become a small APRA (Australian Prudential Regulation Authority) fund, or
  • voluntarily wind up the SMSF and roll the benefits into an APRA regulated fund.

There may also be obligations to inform the Australian Securities & Investments Commission (ASIC).

What does this mean for new funds?

If you are establishing a new SMSF, you need to consider whether the corporate trustee is eligible to act as the trustee before you make the appointment. Although it is not clear, the wording of section 120(2)(ca) of the SIS Act implies that a company cannot act as corporate trustee if it has at any point appointed a restructuring practitioner. Therefore, a company may be disqualified even if it appointed a restructuring practitioner, successfully restructured itself, and has continued to trade successfully since retirement of the restructuring practitioner.

Additionally, members and their advisors should carefully consider using a special purpose company to act as SMSF trustee, and not a trustee which conducts other activities such as operating a small business.

Where can you seek further information and assistance?

We recommend that you seek independent professional advice to ensure that your SMSF is complying with the requirements. It is also important to monitor any changes to the requirements to ensure that your SMSF remains compliant and is able to benefit from any streamlining efficiencies.

For further guidance on the SMSF requirements and framework or your obligations, you may:

  • visit the ATO's website here; and/or
  • contact a member of Maddocks' Commercial team on 03 9258 3555.

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Lawyer in Profile

Julian Smith
Julian Smith
Partner
PH: 61 3 9258 3734

Julian Smith is a partner in the Maddocks Commercial team.

Julian advises extensively in the following areas:

  • trusts law;
  • self managed super funds;
  • business and company sales and acquisitions; and
  • financial services law.

Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.

Julian has been with Maddocks since undertaking articles in 2001.