Everyone enjoys traveling to different countries, which can include taking short holidays, extended trips or even moving overseas. For members of a self-managed superannuation fund (SMSF), taking a regular holiday is not an issue, but those who are overseas for an extended period need to be aware of what this means for their SMSF.
One potential issue is the impact on the residency status of the SMSF if members make contributions whilst overseas. Where a fund is deemed to be non-resident it will no longer be a complying superannuation fund and may lose its concessional tax status. This can be a very costly mistake, so it is vital for trustees to be across the residency rules.
For an SMSF to be classed as an Australian superannuation fund, and therefore benefit from the generous tax concessions, it must meet 3 conditions:
- The Fund was ‘established in Australia’, or at least one of its assets is located in Australia.
- The central management and control of the fund is ordinarily in Australia.
- The fund either has no active members or it has active members who are Australian residents who hold at least 50% of;
the total market value of the fund’s assets attributable to superannuation interests, or
the sum of the amounts that would be payable to active members if they decide to leave the fund.
The 'active member' test is the main area where a fund may have issues if members are wishing to make contributions whilst overseas.
Central management and control
The central management and control of an SMSF relates to the core responsibilities of SMSF trustees. For example, formulating an investment strategy, monitoring performance and determining how assets should be used to pay member benefits. It is possible for trustees to meet this test when SMSF trustees are outside Australia for short periods, provided they can show their absence is only temporary. It is generally accepted that this means a period of up to two years, provided it can be shown that they are not intending to be out of the country on a permanent basis.
It is also possible for trustees to formally delegate their responsibilities, for example using an enduring power of attorney, to someone who is residing in Australia.
For the purpose of the fund residency test, a fund member is an ‘active member’ if they contribute to the fund or contributions are made to the fund on their behalf during the income year. A member who does not make contributions will not be an ‘active member’, even if they may have made other transactions, like pension payments or withdrawals from their accumulation balance. For the purpose of this test, contributions include concessional, non-concessional and other contributions as well as rollovers.
A fund which believes that the only ‘active members’ it will have for a particular income year will be non-residents for tax purposes could consider specifically having the resident members also make contributions to try and avoid fund residency issues.
Once you know who the ‘active members’ of the fund are for the income year it must then be determined who are Australian residents and who aren’t. The primary test to determine the Australian residency status is the ‘resides test’. Some of the factors that can be used for this test include:
- Physical presence
- Intention and purpose
- Business or employment ties
- Maintenance and location of assets
- Social and living arrangements
If you do not satisfy the ‘resides test’, you will still be an Australian tax resident if you satisfy one of the following three statutory tests:
- Domicile test
- 183-day test, or
- The Commonwealth superannuation test.
With the knowledge of who the ‘active members’ are, and which of the ‘active members’ are Australian residents you can now carry out the ‘active member’ test by comparing the balances of the ‘active members’ who are Australian residents to the total balance of all ‘active members’.
Arnold, Elise and their daughter Margaret are members of a family SMSF. Arnold and Elise are both retired and moved overseas several years ago. They believe that one day they may return to Australia, but currently have no plans to move back and had sold their home in Australia when they moved. Arnold and Elsie have set up enduring powers of attorney to delegate responsibility for the running of the SMSF to trusted relatives while they are abroad. Fund decisions are therefore made by Australian residents, ensuring central management and control of the SMSF remains in Australia.
While overseas Arnold decided to consolidate the balances he still had remaining in Australia by rolling them in to the SMSF from his employer sponsored super fund. By making these contributions Arnold is now considered an ‘active fund member’ for the income year. Edwina did not make any contributions, however Margaret had made a contribution during the income year, which also made her an ‘active member’. As Arnold and Margaret are ‘active members’ both of their balances will be included in the ‘active member’ test to determine the residency status of the fund.
We now know which members will be included in the ‘active member’ test, but of those members, we also need to know which are Australian residents and which are not. Looking at some of the relevant factors for the ‘resides test’ we see that Arnold currently lives overseas with his wife and has for several years, with no specific plans to return to Australia. His home in Australia was also sold when he moved overseas. Based on this information Arnold is likely to be judged not to be an Australian resident for tax purposes. While Arnold will not be an Australian resident, Margaret will be as she currently lives in Australia and has for her entire life.
Looking at the ‘active member’ test for residency purposes Arnold’s balance in the SMSF is greater than Margaret’s. This will mean that over 50% of the amounts payable to active members are held by non-residents. With this being the case the fund will fail the ‘active member’ test and therefore the fund would lose its residency status.
A fund which loses its residency status will become a non-complying fund. As a non-complying fund, it will not be eligible for concessional tax treatment, with assessable fund income being taxed at 45% for the income year. A fund which has lost (or believes it may lose) its residency status has the option of winding up the SMSF and rolling over member balances to a resident regulated superannuation fund to avoid the penalty of being a non-complying fund. Another option is to appoint a professional trustee to run the fund as a Small-APRA fund.