Impact of Part 9 and Part 10 Debt Agreements on Setting Up an SMSF

A Self-Managed Superannuation Fund (SMSF) offers greater control over your retirement savings, but for individuals facing financial hardship, particularly those in a Part 9 or Part 10 debt agreement, setting up or managing an SMSF may come with certain challenges. This article explains the implications of being under a debt agreement and what you need to know about setting up an SMSF while in such agreements.

What is a Part 9 Debt Agreement?

A Part 9 Debt Agreement is a formal, legally binding arrangement between an individual and their creditors, designed to help manage financial distress without resorting to bankruptcy. It involves negotiating a reduced amount of debt, typically over 3–5 years.

Key Features of a Part 9 Debt Agreement:

• For individuals with unsecured debts under a specific threshold (usually around $250,000).
• A trustee is appointed to manage the agreement and the repayment schedule.
• Unsecured debts such as credit cards, personal loans, and medical bills are included, but secured debts (e.g., mortgages) are excluded.
• Once approved, the agreement is legally binding for all parties involved.

What is a Part 10 Debt Agreement?

A Part 10 Debt Agreement is similar to a Part 9 agreement, but it’s designed for individuals who owe more than the limit for Part 9 (above $250,000 in unsecured debt). It is also used by those who may not qualify for a Part 9 agreement due to their financial situation.

Key Features of a Part 10 Debt Agreement:

• There are no specific debt limits under Part 10, making it suitable for those with larger debts.
• A trustee manages the agreement and helps negotiate the terms with creditors.
• More flexible than a Part 9 debt agreement and may offer lump-sum payments or extended repayment plans.

Setting Up an SMSF During a Debt Agreement

Setting up a Self-Managed Superannuation Fund (SMSF) is an appealing option for individuals who want more control over their superannuation investments. However, individuals under a Part 9 or Part 10 debt agreement should consider how these arrangements impact the process of setting up or managing an SMSF.

SMSF Setup: Trustee Requirements

To set up an SMSF, individuals must meet certain trustee requirements. This includes being a fit and proper person under the Superannuation Industry (Supervision) Act 1993 (SIS Act), which regulates SMSFs.

Impact of Debt Agreements:

• If you are under a Part 9 or Part 10 debt agreement, the trustee of your debt agreement is legally required to manage your financial affairs.
• Debt agreements may restrict your ability to act as a trustee of an SMSF.
• Bankruptcy (which may follow if a Part 10 debt agreement fails) disqualifies you from acting as a trustee of an SMSF, as the ATO (Australian Tax Office) requires SMSF trustees to be fit and proper persons.
• While not automatically declared unfit just because you are in a debt agreement, being in a Part 9 or Part 10 agreement may raise concerns about your ability to manage an SMSF.

SMSF Trustees and Financial Control

When you set up an SMSF, you are responsible for managing the fund’s investments and ensuring compliance with relevant superannuation laws. You are required to make sure the fund is legally compliant, including meeting record-keeping and audit requirements.

Impact of Debt Agreements:

• If you are in a Part 9 or Part 10 Debt Agreement, you may find it more challenging to manage your finances, including contributing to your SMSF, as a significant portion of your income will likely be directed towards repaying creditors.
• While you are not necessarily prevented from contributing to an SMSF under a Part 9 or Part 10 debt agreement, you may face restrictions based on your available income. The trustee managing your debt agreement may require you to prioritize debt repayment over any additional financial commitments, including super contributions.

SMSF Contributions During a Debt Agreement

In an SMSF, both voluntary and mandatory contributions are allowed, but individuals in debt agreements may face constraints.

Impact of Debt Agreements:

• Mandatory super contributions from your employer should still be paid into your SMSF, even if you’re in a debt agreement.
• Voluntary contributions to your SMSF may be difficult to make, especially if your disposable income is reduced due to debt repayments.
• If you are under a Part 10 Debt Agreement, and the trustee has significant control over your finances, voluntary contributions to your SMSF could be restricted or put on hold until your debt is repaid.

SMSF Audits and Compliance Obligations

Every SMSF is subject to annual audits and compliance checks by the Australian Taxation Office (ATO). These audits ensure that the SMSF is following all superannuation laws, including those relating to investments, contributions, and tax obligations.

Impact of Debt Agreements:

• If you are in a Part 9 or Part 10 Debt Agreement, you must still meet the audit and compliance obligations of your SMSF. However, the additional financial strain caused by the debt agreement could make it more difficult to manage the fund properly, potentially leading to audit issues or compliance failures.
• You may also face challenges when it comes to documenting and reporting contributions, expenses, or changes in your SMSF due to the constraints of the debt agreement.

Can You Set Up an SMSF After a Debt Agreement?

While Part 9 and Part 10 Debt Agreements don’t outright prohibit you from setting up an SMSF, there are several factors that could make it more challenging, including:

• Trustee Requirements: If your debt agreement impacts your financial standing or raises concerns about your financial management, you may face difficulties meeting the fit and proper person test required by the ATO.
• Financial Constraints: The main challenge will likely be your ability to make contributions to your SMSF due to the debt repayment obligations.
• Compliance Challenges: Managing an SMSF requires attention to detail and financial control, which may be difficult if your income is tied up in debt repayments or if you experience financial strain.

Conclusion: Weighing Your Options for an SMSF During a Debt Agreement

If you’re considering setting up an SMSF while under a Part 9 or Part 10 Debt Agreement, it’s essential to assess both the feasibility and the potential consequences. While it’s not impossible, the financial constraints of a debt agreement and the trustee requirements could make it challenging.

Before proceeding, it’s highly recommended to consult a financial adviser or superannuation expert who can help you navigate the complexities of SMSF setup in light of your debt agreement.