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SMSF members going overseas? - Federal budget proposes changes

In its budget the Government is proposing to relax the rules about making contributions into your self-managed super fund (SMSF) whilst overseas. Currently members cannot make any contributions if overseas for longer than 2 years. This change will allow members to continue to contribute to their superannuation while temporarily overseas and therefore continue to save for retirement whilst also maintaining a compliant SMSF. This article outlines the current rules about how to maintain a complying fund when a member goes overseas and outlines the changes proposed in the budget.

Sam McKenzie, Maddocks Lawyers

Get the right advice

The rules relating to residency of a SMSF for tax purposes are complex, and the consequences of non-compliance are serious. Accordingly it is essential that trustees and members obtain professional advice specific to their fund.

Getting the right advice is even more important when the rules change.

What are the current rules?

The current rules provide that for a SMSF to be a 'complying fund', the SMSF must be an Australian superannuation fund. This requires the SMSF to satisfy three residency rules, namely:

  1. the SMSF must be established in Australia or have at least one Australian-based asset;
  2. the SMSF's ongoing central management and control must usually be conducted in Australia, this is generally where the trustees of the SMSF make decisions about the SMSF (Trustee Presence Rule) - the Trustee Presence Rule is not breached if the trustee locates their trustee functions outside of Australia for less than 2 years (Exemption); and
  3. the fund must satisfy the active members asset rule, which requires that the fund either has no active members or it has active members (i.e. members making fund contributions) who are Australian residents and who hold at least 50% of fund assets (Active Members Asset Rule).

SMSFs that fail to satisfy the three residency rules are consequently non-compliant. This can have severe repercussions on the members of the SMSF. If a SMSF becomes non-compliant, then the ATO will be forced to take enforcement action: it may freeze the SMSF's assets, the SMSF's income will be assessed at the highest marginal rate, or wind-up the SMSF, which usually involves liquidating the SMSF's assets and transferring the member balances to a public super fund.

These rules provided a restricted framework for overseas involvement in an SMSF. In particular, ensuring that temporary relocation was limited to 2 years, that the contributions to the SMSF are Australian-sourced and the assets of the SMSF remain in Australia.

In order to satisfy the Trustee Presence Rule while the member is overseas, members often appoint an attorney under a Power of Attorney to act as a trustee or director of the trustee in the member's place.

So what are the changes proposed in the 2021 budget?

The main budget announcement related to relaxing residency requirements for SMSFs.

Two fundamental amendments to the incumbent trustee's residency requirements are proposed:

  • Extending the Exemption to the Trustee Presence Rule from two to five years; and
  • Removing the Active Members Asset Rule.

These measures will have effect from the first financial year after Royal Assent of the enabling legislation, which is expected by the Government to have occurred prior to 1 July 2022.

What will these changes mean?

Primarily the changes would mean SMSF members can continue to contribute to their retirement whilst overseas, ensuring parity with members of large APRA-regulated funds. This importantly provides SMSF members the flexibility to maintain, and further contribute to, their preferred fund while undertaking overseas work and education opportunities. This is an important change, given the ever-increasing globalisation of the workforce and - at least at present - the challenges which many Australians are having in returning to Australia.

The current rules also often force Australians, who are or may be non-Australian tax residents, to put someone else in charge of their key retirement asset until they return - and in most cases this is not the preferred position for most SMSF trustees and members.

The SMSF Association lobby group, which pushed for both measures, further contended that these amendments will remove complexity in the superannuation system and reflect the modern world, where temporary relocation is becoming more common.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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Lawyer in Profile

Paul Ellis
Paul Ellis
Special Counsel
+61 3 9258 3524

Qualifications: LLB, Deakin University, BA (Political Science), Monash University

Paul is a Special Counsel in Maddocks Government and Not-for-Profit Commercial team. He specialises in:

  • the establishment, governance, operations, regulation and administration of charities and other not-for-profit entities,
  • in commercial arrangements for the procurement or supply of goods and services, including technology services, and
  • in compliance and enforcement activities undertaken by government agencies.

Paul is Maddocks' main authority in relation to the Personal Property Securities Act 2009.

He has an in-depth understanding of the government sector, as his experience prior to Maddocks includes 13 years with the Victorian Department of Justice.

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