PORTFOLIO POINT: SMSF trustees who plan to work or travel overseas for an extended period must carefully structure a management plan to ensure their fund remains compliant.
Whether it is an overseas work placement, the allure of travel or the need to try something new, more and more self-managed superannuation fund (SMSF) trustees and members are taking the opportunity to work, travel or live overseas. For SMSF trustees and members considering such a move, they must be conscious of the SMSF residency trap and take the time to structure a plan to manage their SMSF appropriately during an extended overseas stay. This article explains the law and the issues associated with having a resident Australian SMSF.
SMSF Resident Regulated Funds
An SMSF is a resident superannuation fund at a particular time (referred to as the 'relevant time’) only if the following four conditions are satisfied:
1. The fund is a benefit, superannuation or retirement fund at the time;
2. The fund was established in Australia, or at least one fund asset at the relevant time is located in Australia;
3. The central management and control of the fund is 'ordinarily’ in Australia or the fund satisfies the temporary absence rules (see below for further details); and
4. The fund satisfies the Active Member test (see below for further details).
Central management and control
According to the Australian Taxation Office (ATO), the central management and control of an SMSF involves a focus on who, when and where the key strategic decision-making processes and activities of the fund rests, including formulating, reviewing, updating and varying the investment strategy of the fund, as well as monitoring and reviewing the performance of the fund’s investments.
Essentially this requires trustees (or directors of corporate trustees) to be able to meet and to attend to the business of the SMSF in Australia. As the place where trustee decisions are made is critical, it is possible that if the majority of trustees (or directors) are located overseas, the central management and control condition cannot be met.
According to the ATO, whether the central management and control of a fund is ordinarily in Australia at the relevant time involves determining whether the central control and management of the fund is regularly, usually or customarily exercised in Australia and there must be some element of continuity or permanence.
Temporary absences from Australia
Subsection 295-95(2) of the Income Tax Assessment Act 1997 provides that the central management and control of an SMSF is ordinarily in Australia, even if that central management and control is temporarily outside for a period of not more than two years (although in some cases, and in consultation with the ATO, the central management and control of an SMSF can be outside Australia for a period greater than two years if the period is still temporary). In the latter case, it is strongly advised that SMSF trustees and members discuss their length of absence with the ATO prior to their departure.
A member of a fund is an active member of a fund at the relevant time, as defined in 6E of the Income Assessment Act 1936, if:
'¢ The member is a contributor to the fund at the relevant time; or
'¢ Another person has made before that time, or makes at or after that time, contributions (including rollovers) to the fund on the member’s behalf in respect of the year of income in which that time occurs.
A member of a fund is not an active member of a fund at the relevant time if:
'¢ The member is not a resident of Australia at the relevant time; and
'¢ The member has ceased to be a contributor to the fund at the relevant time; and
'¢ The only contributions (or rollovers) that have been made to the fund on the member’s behalf after the member ceased to be a resident of Australia have been payment in respect of a time when the member was a resident.
A fund will satisfy the active member element of the residency test at the relevant time, and for the income year in which that relevant time occurs, if the fund has no active members or has active members who are Australian residents holding at least 50% of:
'¢ The total market value of the fund’s assets attributable to superannuation interests held by active members (i.e. their member account balances); or
'¢ The sum of the amounts that would be payable to or in respect of active members if they voluntarily cease to be members.
In essence, this means that the active member element of the residency test should be monitored carefully to ensure that if there are any active members, the 50% accumulated entitlement requirement is met. However, if the fund does not have an active member at the relevant time, the 50% requirement is not applicable and the fund will be an Australian resident SMSF at the relevant time, provided the first three conditions mentioned earlier have been met.
Consequences of non-compliance
If the SMSF does not meet the above test, the total assets of the SMSF (less non-concessional contributions) may be taxed at 45% and the fund may also lose tax concessions in future years.
Although moving overseas does not necessarily mean that an SMSF needs to be wound up, it is important that SMSF trustees and members carefully plan their move to ensure their fund remains compliant. Should the trustees and members plan to go overseas permanently or temporarily for two years or more, they should certainly seek specialist advice.
* This is an edited version of an article which first appeared in The Investing Times. Mark Sullivan is a Senior Adviser with Lachlan Partners who is the publisher of the Investing Times newsletter.