An often overlooked and misunderstood aspect of operating a Self Managed Super Fund (SMSF) is the requirement for trustees to continually monitor the fund’s residency status.
- temporarily leave Australia for more than two years;
- leave Australia and stay overseas indefinitely; or
- leave Australia during the year and become a non-resident for tax purposes.
This is especially important as our workforce becomes more global. For example, a fund member may accept an overseas job transfer or otherwise leave Australia for an extended period.
Failure to satisfy the residency rules can result in the fund becoming non-complying; losing not only its tax concession on income but the assets in the fund (less the non-concessional elements) are subject to tax at the top marginal rate (currently 47 %).
The ATO has indicated that it has no discretion to ignore non-compliance arising from non-residency status.
The fundamental requirement for a SMSF to qualify for concessional tax treatment is to be a complying super fund. To be a complying fund, the SMSF must, among other things, be a ‘resident-regulated superannuation fund’ at all times by passing all three residency tests as outlined below.
Test 1 – The fund was established in Australia, or any asset of the fund is situated in Australia at that time
Most funds meet the first test provided they are established in Australia or any asset of the fund is situated in Australia at that time.
Test 2 – At that time, the central management and control (CMC) of the fund is ordinarily in Australia
CMC is where the high-level strategic actions relating to the fund are made such as formulating and reviewing the investment strategy and performance.
It does not include day-to-day operational activities such as accepting regular contributions, paying member benefits or undertaking normal administrative tasks.
The term ‘ordinarily in Australia’ allows for trustees to exercise CMC from overseas while they are temporarily absent. The character of their absence is determined by their intention at the time they leave and any subsequent changes to that intention.
As a guide, CMC is ordinarily in Australia at a time even if the CMC is temporarily outside Australia for a period of not more than 2 years.
Some factors that might demonstrate that the absence is not temporary include:
- family home in Australia being sold
- new home being purchased in the overseas location
- no return flight being booked
Test 3 – At that time either the fund had no active members or at least 50% of the superannuation account balance in the SMSF belongs to ‘resident active members’
A member is an active member if the fund receives any contributions or rollovers on the member’s behalf. There is an exception for foreign residents for whom the fund receives contributions relating to a time when they were an Australian resident.
How to avoid residency problems
If contributions must be made, members going overseas could arrange to have them made outside of their SMSF, for example through a retail or industry super fund. They could later rollover the contributions to their SMSF when they return as an Australian resident.
To assist in satisfying the CMC test, trustees should document their intention of temporary absence or, if unable to establish that the departure is on a temporary basis, delegate trustee duties to an Australian resident by appointing a Power of Attorney to exercise CMC.
SMSF trustees are responsible for ensuring their fund remains compliant by continuing to meet the definition of resident-regulated superannuation fund.
It is crucial that trustees seek advice on how their SMSF will be managed before any members go overseas. Communication and planning is essential so that preventative measures can be adopted to ensure that the fund remains compliant.
If you are planning to go overseas for an extended period, we recommend contacting an advisor.
For more information, contact Simon Barry from our Business Advisory division on (07) 3023 1300.