Tax & Accounting Blog

Winding-up SMSFs and LRBA trusts

Blog, Superannuation, Tax, Trusts January 20, 2015

Professional liquidators face additional challenges when winding up a corporate trustee of a self-managed superannuation fund (SMSF). While a liquidator has the power to administer a trust and is entitled to be indemnified out of the trust assets, an SMSF trustee company (in liquidation) becomes a “disqualified person” upon the commencement of its winding up. Accordingly, the trustee company will thereafter commit an offence under s 126K of the SIS Act if it is or acts as superannuation trustee or custodian. Furthermore, if the company (in liquidation) resigned as trustee, as would be prudent, it would have no power of sale over the trust assets. To work around these SIS Act restrictions, a liquidator of an SMSF trustee company will generally need to be appointed by a court as a receiver and manager of the assets of a SMSF with a schedule of powers to sell the assets.

Recently, in SMP Consolidated Pty Limited (in liquidation) v Posmot Pty Limited (as trustee for the Posmot Super Fund) [2014] FCA 1382, the Federal Court agreed to appoint a receiver to enable the sale of a property held in a custody trust under a limited recourse borrowing arrangement (LRBA). This followed the Court’s finding that the liquidator of the trustee of the LRBA custody trust could not complete the sale without committing an offence under the SIS Act. The corporate trustee of the SMSF (the defendant) had entered into a deed with SMP Consolidated Pty Ltd (now in liquidation) to hold a property at Castle Hill NSW. The sole function of SMP Consolidated Pty Ltd was to act as the trustee of the holding trust for the property under a LRBA for the benefit of the SMSF in compliance with s 67(4A) of the SIS Act. (Note that while s 67(4A) has been superseded by ss 67A and 67B, s 67(4A) still applies in relation to an LRBA in place before 7 July 2010.)

A liquidator appointed for SMP Consolidated Pty Ltd caused it to enter into a contract to sell the property for $450,000. The sale proceeds would then be used to discharge the $226,000 mortgage and other debts (eg council rates and strata levies). Before settlement, the liquidator became aware that SMP Consolidated Pty Ltd had become a “disqualified person” under s 120(2)(e) of the SIS Act by virtue of it being a body corporate that had begun to be wound up. Accordingly, the company would commit an offence under s 126K if it continued to act as a custodian of a superannuation entity, and the liquidator may be liable as an accessory. The liquidator applied to the Court to be appointed as a receiver of the assets of the trust to enable the sale of the property to be completed using the powers of a court-appointed receiver (rather than as an agent of the company).

The Court agreed to appoint the liquidator as a receiver and manager of the assets of the holding trust with the power to convert into cash any assets of the trust. While it was possible for SMP Consolidated Pty Ltd to resign its office as trustee of the property, the Court noted that it wasn’t clear if anyone would be willing to take on the role as trustee of the holding trust. In appointing the liquidator as a receiver, the Court essentially followed Re Stansfield DIY Wealth Pty Limited (in liquidation) [2014] NSWSC 1484 (which involved the winding up of a corporate trustee of a SMSF). In that case, the NSW Supreme Court held that the liquidator would be justified in applying to be appointed receiver and manager of the trust assets. This would enable the liquidator, as receiver, to realise trust assets to enforce the (former) trustee’s indemnity, and apply the proceeds to discharge the liabilities of the company (all of which were incurred in the capacity of trustee), the Court said.