Superannuation professionals and SMSF trustees must be conscious of the residency trap and take the time to structure a plan to manage SMSFs appropriately during any extended overseas stay by SMSF trustees and members. Recent changes make the trap harder to avoid.Paul Ellis
Previously, ClearLaw has described how an SMSF may lose its concessional tax status if its members spend time overseas. Changes to superannuation tax law since that ClearLaw bulletin have made the residency trap harder to avoid.
The changes to SMSF residency rules:
For an SMSF to be a 'complying fund' and to receive concessional tax treatment, it must be an 'Australian superannuation fund'. To be an Australian superannuation fund, the SMSF must:
We focus on the trustee presence rule as this is the only rule affected by the changes. (The other rules are summarised below.)
Under the trustee presence rule, the central management and control of the SMSF must be in Australia. In summary, this rule holds that:
The old exception — 28 days every 2 years
Under the old provisions2, the trustees or directors of the trustee could return to Australia for 28 days to restart the 2 year period — easy, just visit friends and family and take in a test match or the tennis once every 2 years. Regardless of how permanent the trustees' (or directors of the trustee's) move overseas is, the fund would still comply with the trustee presence rule.
The new rule — no more than 2 years
The new provision provides that:3
This changes the trustee presence rule because:
The other requirements for an SMSF to be an 'Australian superannuation fund' did not change in the reforms. They are:
The establishment rule
The SMSF must either:
There is no exception to this rule.
The active members asset rule
This rule is satisfied if:
Generally speaking, an active member is a member who is currently contributing to the SMSF, or who is resident in Australia and on whose behalf contributions are being made to the SMSF.
However, there is also an exception to this rule. The amount of active member entitlements does not include those of a member:
This exception is available because the member is considered non-active.
But, even if that exception applies, a member who is a non-active and non-resident member will still present a problem to the SMSF if they are overseas for more than 2 years. This is because the SMSF will not be able to comply with the trustee presence rule.
The ATO continues to state that it will monitor the residency status of SMSFs.
Accordingly, if the trustees, or the directors of a trustee, of an SMSF will be absent from Australia for more than 2 years, then they should consider either:
However, each of these measures:
Therefore they should be considered carefully, and as always, should be the subject of professional advice.
Alternatively, SMSF trustees may wish to consider seeking advice about appointing attorneys to manage the SMSF during the extended absence. There are a number of risks associated with this strategy — including in relation to surrendering control over retirement assets to non-professional trustees. Accordingly, such a step should not be considered lightly.
Paul is a Special Counsel in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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