SMSF assets surrendered to bankruptcy trustee in compliance “mess”

The case of Frigger v Trenfield (No 10) [2021] FCA 1500 is a cautionary tale of the avoidable risks for anyone with a self managed superannuation fund (SMSF) with individual trustees.

In the case, the members and individual trustees of the SMSF, Mr and Mrs Frigger, were undischarged bankrupts, and therefore a trustee in bankruptcy was seeking to recover their assets. The dispute arose because Mr and Mrs Frigger said that some of the assets claimed by the trustee in bankruptcy were in fact owned by them as trustees of their SMSF and therefore out of reach.

The argument by Mr and Mrs Frigger arose because the Bankruptcy Act provides that assets held in a superannuation fund are not available to the trustee in bankruptcy. If the Friggers could prove the assets were those of the SMSF, they would be ‘off-limits’ to their creditors.

The Trustee in bankruptcy argued that the bank accounts, share portfolios and properties were acquired by Mr and/or Mrs Frigger in their individual names, and not as trustees of their SMSF. In some cases, this was because the asset was acquired by the Friggers prior to the establishment of the SMSF, and in others, because the asset is in one of the their names only.

Superannuation (and in particular the SMSF sector) is heavily regulated, which is unsurprising given the significant wealth held in superannuation funds in Australia. Some of the key compliance rules include:

  • the obligation for trustees to ensure the fund is compliant;
  • the obligation for trustees of SMSF to keep all money and other assets of the fund separate from any other assets held by the trustee personally (not in its capacity as trustee of the SMSF); and
  • the prohibition on an SMSF acquiring assets from its members or the related parties of the members.

The assets in question included bank accounts, shares and properties – some of which were registered in Mrs Frigger’s sole name, some in Mr and Mrs Frigger’s joint names and even some owned by their daughter (who was, for a time, a member and trustee of the fund). Apart from the confusion about the name in which assets were registered, the Friggers had used the same bank account for their SMSF and for some business transactions.

Ultimately, the Federal Court judge found that Mr and Mrs Frigger failed to establish that the assets they claimed were held as trustees of the SMSF were genuinely held in that capacity. The Court referred to the Friggers’ lack of evidence as to their intention to hold the assets as part of their SMSF, the timing of the acquisition of the various assets and the inability to trace income through the balance sheets of the SMSF in reaching this decision. That meant those assets became divisible amongst their creditors.

Key lessons

A key obligation of a trustee is to ensure that assets are held separately from its own assets – this case shows that when it is not done correctly, those assets can be vulnerable.

One of the clearest ways to ensure that the assets are separately held and registered is to have a corporate trustee whose sole purpose is to act as the SMSF trustee – that way, the legal ownership is clearly separated from that of the members of the fund.

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