For an SMSF to be a 'complying fund' and receive concessional tax treatment, the SMSF must be an Australian resident fund. SMSFs are at risk of losing their complying status, if their members spend time working overseas. This is because the residency rules require trustees and the majority of contributing members to reside in Australia.
For a fund to remain resident, the fund has to satisfy the residency rules throughout an income year — unless an exception applies.
Generally speaking, for SMSFs, the individual trustees of the fund must be the same people as thefund's members. Similarly, if a fund has a corporate trustee, then the directors of the trustee company must be the same people as the fund's members.
Under the residency rules, central management and control of the SMSF must be in Australia: this implies that the trustee directors or individual trustees must function in Australia. Although these are commonly called residency rules, on closer examination they actually involve a physical presence test, rather than a residency test.
However, there is one exception: a trustee or director may be absent from Australia for a continuous period of up to 2 years and still not jeopardise the fund's complying status. To start the 2 year period again, the person must return to Australia for a visit of more than 28 days.
The problem then, is that an overseas assignment of more than 2 years may well pose a residency problem for an SMSF — unless the assignment is broken by a return to Australia for a month or more.
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Non-resident members must not have more than 50% of the total fund of active members
Member residency requirements revolve around the concept of an "active" member. Generally speaking, an active member is a member who is resident in Australia and currently contributing to the SMSF, or having contributions made by their employer to the SMSF.
Under another rule, the accumulated entitlements of non-resident active members must not exceed 50% of the entitlements of total active members — unless an exception applies.
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.
Even if that exception applies, a non-active, 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 trustees' presence rule.
A fund needs to maintain its residency status. If a fund loses its residency status:
The ATO has indicated at recent industry forums, that:
It is crucial to seek advice on how a SMSF will be managed, before members go overseas. Although a member/trustee may plan to be away for less than 2 years, a change of plan to extend the trip may have disastrous results.
If one or more remaining resident members have:
It is important to seek advice about maintaining central management and control in Australia. It is not enough that the trustees may remain resident for tax purposes.
The legislation requires the trustees to be present in Australia, unless the 2 year concession applies. If a majority of the trustees/members remain in Australia or satisfy the 2 year rule, then it may be possible to put forward a case supporting Australian management and control. However, it is crucial to plan ahead and monitor to ensure that compliance is achieved.
If there is any doubt about the central management and control of the fund, it would be prudent to plan for:
Replacing the trustees:
This could be done by converting the SMSF to a small APRA fund with a professional trustee. This approach would generally enable the fund to continue its existing investments and strategy — as long as the new trustee agrees with the existing investment strategy. However, there are increased costs to engage a professional trustee and increased regulatory fees.
Transferring entitlements to another fund:
Another approach is to consider winding up the fund and transferring the entitlements to a larger fund. However, the trustees would lose control over the specific assets: Also larger funds are most unlikely to accept the transfer of the member's specific assets. This means that the SMSF's assets may have to be converted to cash first (with duty and CGT consequences). However, one benefit is that administrative burdens and compliance concerns become a thing of the past.
These choices should be carefully considered in the context of members' long term plans.
Stay on top of the never ending changes affecting superannuation with the following resources from Thomson Reuters:The Essential SMSF Guide and theAustralian Superannuation Handbook. Available in book, ebook and online.
For more information, contact Maddocks on (03) 9288 0555 and ask for Julian Smith or Bernie O'Sullivan.
Daniel is a Senior Associate in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.