Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 385

New bankruptcy rules may have a domino impact on SMSF pensions

Prior to 2020, the bankruptcy rules were fairly straightforward. If you were declared bankrupt, you could no longer trade in your industry.

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

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 SMSFs.

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

This part of the legislation has not changed. If an SMSF 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.

Bankrupts are 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 covered under the Superannuation Industry Supervision Act 1993 SIS ActA new director will need to be appointed if the bankrupt person is the sole member of the SMSF and the sole director of the corporate trustee.

How do changes in bankruptcy legislation affect SMSFs?

COVID-19 hit many individuals and business owners hard in 2020 due to forced closures and lost earnings. The Federal Government threw a lifeline to small businesses at risk of collapse by allowing business owners to continue to trade while insolvent, which borrows heavily from the United States Chapter 11 bankruptcy provisions.

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 impact is more likely on the fund's investments. 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 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 fire sale of assets just to pay pensions as legally required. It shows the risk of using an SMSF to hold a single asset, especially when the SMSF is in pension phase. Trustees need to ensure their fund holds sufficient cash to meet its obligations.

It will require a watchful eye on property assets to ensure those rental payments do continue to roll in and the dominoes are not allowed to fall.

 

Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Firstlinks. This article is for general information purposes only and does not consider any individual’s investment objectives.

For more articles and papers from SuperConcepts, please click here.

 


 

Leave a Comment:

RELATED ARTICLES

What super changes should you know from 1 July?

When an SMSF member becomes disqualified

Meg on SMSFs: Where are the risks in our major super sectors?

banner

Most viewed in recent weeks

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.