SMSF loses assets to trustee in bankruptcy

This month we have seen the judgement in an interesting case which involves an SMSF. 

In Frigger v Trenfield (No 10) [2021], individuals who are undischarged bankrupts brought action against their trustee in bankruptcy with the main issue being whether certain bank accounts, listed shares and residential properties belonged to their SMSF or them personally.  This point was crucial to Mr and Mrs Frigger because if they were found not to be assets of their SMSF, they would instead form part of the property divisible amongst the creditors of their bankrupt estates.

It should be noted the Frigger's case was not assisted by the fact the judge was of the opinion Mrs Frigger knowingly altered documents as part of an attempt to establish the SMSF's ownership of a number of assets recorded in personal names. However, notwithstanding some of the dubious actions taken by the Friggers which damaged their case, there are still lessons to be learnt about the importance of naming protocol and ensuring superannuation fund assets are kept separate from those held personally.

We first note the assets in question were either solely in the name of Mrs Frigger, jointly in the name of Mr and Mrs Frigger, or solely in the name of their daughter Jessica who was a trustee and member of the fund for a period of time. As a starting point, this is of particular interest as during our audits we still see a number of SMSFs whose assets are not recorded correctly. As the outcome of this case demonstrates, if the ownership of an asset in not clearly registered to the SMSF, the asset could be exposed to a claim by another party. Ensuring their interest in an asset is correctly recorded is a simple but crucial step trustees need to get right.  

Even though their assets were not correctly recorded in the name of the trustee ATF the SMSF, this might not have been fatal to their argument they were assets of the SMSF if they had taken other appropriate actions.  In particular the judge noted that where the assets were being held on trust for the trustee of the SMSF, the Friggers should have recorded their status as SMSF assets clearly in a separate, contemporaneous document such as a declaration of trust. Additionally, the Friggers failed to ensure the main bank account was used solely for the transactions of the fund. Instead, some transactions of their business, themselves personally, and the SMSF were all mixed together. Establishing separate bank accounts and share trading accounts for an SMSF are again simple steps that trustees need to take to safeguard the assets of an SMSF.

Another interesting point raised during the case was the practice of assigning 'nicknames' to online accounts. 

The Frigger's argued that labelling the appropriate bank accounts "Frigger Super Fund' on their internet banking demonstrated their intention for those accounts to be accounts of the SMSF.  However, on the issue of the use of 'nicknames', the judge commented "presumably one of the applicants did that, but there is no evidence as to when that occurred, so I place no weight on it."  In addition, the judge referred to "an email from an officer of the Bank of Queensland to the first respondent which supports that inference by saying that for BOQ1 the account name 'has been manually changed by Mr Frigger' and 'is not the true legal title used to open the account'."  This point highlights why auditors need to sight the original bank statement and not simply a printout from the fund's internet banking containing the 'nickname' instead of the legal name.

The outcome of the case was the judge found in favour of the trustee in bankruptcy and therefore a number of assets remained within her control, even though some of the monies within those accounts could have originated from superannuation sources.  This means that because the Friggers didn't name their assets properly or use separate accounts, some funds which were potentially legitimately part of their superannuation, were lost to the creditors. This then is an important lesson for trustees on the significance of keeping their money and assets separate as regulation 4.09A of the SIS regulations requires.

If you have any questions about this case, please do not hesitate to give the Baumgartner Super team a call on 1300 04 SMSF (1300 047 673).