Pay attention to the rules or suffer painful consequences
The recent case of an SMSF made non-complying by the ATO, due to losing its status as an Australian superannuation fund, provides a salutary lesson for all SMSF trustees.
Through a combination of negligence by the SMSF's accountant, and inaction of the trustees, almost half the value of the fund has been lost in penalties.
For an SMSF to be classed as a complying super fund by the ATO, and be eligible for the tax concessions, it must be classed as an Australian super fund. The three tests a fund must satisfy to be classed as an Australian superannuation fund are:
■ The fund must have either been established in Australia or have an asset situated in Australia.
■ The central management and control of the fund must ordinarily be in Australia.
■ The fund has no active members or at least 50 per cent of the market value of the fund's assets belong to members who are Australian residents.
The first of the tests is easy for SMSFs to pass. In virtually all cases they will have been established under a trust deed drawn up in Australia and the bank account and other assets are in Australia.
It is the other two tests that can cause major problems for members of an SMSF if they are absent from Australia for more than two years. Central management and control of a super fund must be exercised by its trustees. This means when formulating the investment strategy for the fund, monitoring the investments of the fund, and deciding on how the funds are to be used by the members, they must be Australian tax residents.
An active member of a super fund is one that either makes personal contributions or has employer contributions made on their behalf. If a fund has active members they must hold at least 50 per cent of the total market value of the fund's assets and be resident in Australia.
There is a high level of duty and responsibility that falls on the shoulders of trustees of an SMSF. They cannot abrogate this responsibility and shift the compliance responsibility totally onto the shoulders of their accountant or adviser.
In the case in question, a couple established an SMSF in 2003. Annual returns were lodged by the fund for the 2004, 2005 and 2006 years. In 2007 the couple left Australia to take up employment in Singapore and after four years moved to Hong Kong. Over that time they visited Australia only briefly. From the time they first left Australia no further tax returns or statements were prepared and lodged for the SMSF, despite the trustees having left this responsibility with their accountant.
In 2008 the SMSF received a rollover from another super fund for one of the members. As a result of the rollover, the fund was regarded as having an active member in that year. Because the trustees and members have been absent from Australia for more than five years, and they have been shown as non-residents on their personal tax returns, the ATO classed it as being non-complying due to not being an Australian super fund. A tax
penalty of 46.5 per cent was levied on the fund.
This area of super law is very specific and allows no discretion to the ATO. Steps could have been taken to ensure the three tests were satisfied but nothing was done. Trustees of an SMSF considering leaving Australia for an extended period must take steps to ensure they do not suffer a similar fate.