SMSFs and the importance of Australian residency

SMSFs and the importance of Australian residency

To be a complying super fund and receive the concessional tax rates available in superannuation, an SMSF needs to be classified as a resident-regulated fund at all times during the year. This means that the fund needs to meet the definition of an Australian superannuation fund for tax purposes.

In short, residency status, in relation to an SMSF, is very important. 

What makes an SMSF an 'Australian resident'?

In order for any superannuation fund to be designated as an Australian resident, it needs to meet all three of the following conditions. I explain these conditions in more detail below.

  1. The fund needs to have been established in Australia, or at least one of the fund’s assets is located in Australia.
  2. The central management and control of your fund is ordinarily in Australia.
  3. The fund satisfies the ‘Active Member Test’.

How do I ensure that my fund is, and remains, an Australian resident?

You do this by meeting all three of the conditions mentioned above. To elaborate:

  • The fund is established in Australia, or at least one asset located in Australia. To meet this condition, either the trust deed must be signed and executed in Australia, or money or other property, including both real property and shares, are located in Australia.
  • Central Management and Control. The central management and control of your fund refers to the strategic, high level decision making processes of the fund. These include activities like formulating an investment strategy, reviewing the performance of the fund’s investments or determining how assets are to be used for member benefits. These activities need to be conducted in Australia for the fund to be deemed a resident of Australia. However, in some situations a fund’s central management and control may be outside of Australia for a period of time. In general, your fund will still meet the requirement if its central management and control is temporarily outside Australia for up to two years. The key word here is temporary - if the central management and control of the fund is permanently outside Australia for any period of time, this two year ‘rule of thumb’ will not apply.
  • Active Member Test. The third test that must be satisfied for a fund to be an Australian superannuation fund is the ‘active member’ test. A member is an ‘active’ member if either they or someone else is making contributions to the fund on their behalf. The 'active member' test is satisfied if the fund either has no active members or the active members are Australian residents who hold at least 50% of the total market value of your fund’s assets attributable to super interests, OR the sum of the amounts that would be payable to active members if they decided to leave the fund. 

What are the consequences if a superannuation fund is deemed to be a non-resident?

The consequences are quite severe. The fund immediately becomes a non-complying fund, which means that not only does the fund not have access to the concessional tax rates (15% in accumulation phase and 0% in pension phase), but the income AND assets (less certain contributions) of the fund are taxed at the highest marginal tax rate. This is currently 45% not including Medicare levy of 2%! Learn more about other penalties the ATO can impose here.

I’m heading overseas for a secondment, around 2 years, but I fully intend to return. What do I do? Will my fund be classified as a non-resident if I head overseas for more than two years?

The central management and control of a fund is decided on a case-by-case basis. There have been cases where trustees have exceeded their stay overseas by more than two years, but the fund was deemed to remain an Australian resident. In these cases, the trustees were always intending to return to Australia, and this was proven by virtue of not selling their family home, keeping bank accounts and assets. The fund was deemed to still have the central management and control ‘ordinarily’ in Australia despite the longer absence, and therefore still qualified as a resident fund.

On a practical level, if you're looking to be outside of Australia as an SMSF trustee make sure to discuss your travel plans and concerns in detail with your SMSF administrators and auditor before you leave. Auditors must report to the Australian Tax Office (ATO) if they have any concerns on the residency of a fund, and by then it may be too late to rectify any problems. The ATO ruling that concerns SMSF residency has several examples which can assist trustees and auditors when determining the residency status of a fund.

I’m heading overseas and I don’t intend to return. What do I do with my existing SMSF?

You have a couple of options here. The simplest thing to do is to transfer your existing super to an external fund (such as a retail or industry fund) and have it managed by a third-party trustee. And then wind up the SMSF.

If you really want or need to keep your SMSF for various reasons (for example, because there is an asset/s in the fund that you don’t wish to or can’t sell), you do have the option of appointing another individual/s who will remain Australian residents to be the trustee and legal personal representative of your fund, via an enduring power of attorney. You will need to cease to be a trustee (or a director, if the fund has a corporate trustee) and appoint the new individual/s you choose. This process is made easier by having a corporate trustee, and I explain why in my previous post: should you use individual or corporate trustees in your SMSF?

By appointing another trustee/director and making sure that they operate and control the fund’s decisions on a high-level basis, you’ll be able to ensure that your SMSF still qualifies as an SMSF as well as retaining its Australian residency. Please be aware that this will give those you choose to be trustee power over the management and operations of your superannuation fund, so it’s imperative that you choose people that you trust.

Finally, always make sure that your SMSF's trust deed allows the delegation of responsibilities to a third party before proceeding. Many SMSF trust deeds allow the the delegation of trustee responsibilities, however we strongly advise you to review your trust deed and be fully aware of its details, and to seek professional advice before proceeding. Should you find your trust deed does not allow it and you wish to update it, please liaise with your administrator or solicitor to update it (additional costs may apply). 

Please visit the SMSF portion of the ATO website for further information on SMSFs and residency. 

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