Why is residency important for a SMSF?
To be an SMSF one of the tests that must be passed is to be a resident of Australia. If a fund is not a resident it is not a SMSF. A fund not meeting the residency requirements means it does not obtain concessional tax treatment available for a SMSF and the members do not receive tax concessions available in relation to a superannuation income stream or a superannuation lump sum payment.
Besides the general 15% tax rate on earnings and concessional contributions a SMSF can obtain a refund of excess franking credits which is particularly advantageous when a fund is in 100% pension mode as the whole franking credit may be refunded. The tax rate can reduce to nil when the fund is in 100% pension phase for all of a financial year.
In the year an SMSF stops being an Australian resident fund it becomes non-complying and can lose up to 45% of the market value of the fund’s assets less any non-concessional contributions made to the fund. In addition, tax of 45% is imposed on the fund’s income.
The Australian Taxation Office (ATO) do not have any discretion not to make a SMSF non-complying when it becomes a non-resident fund. There is no fix or 6-month grace period which is allowed in other circumstances.
What is an SMSF Australian resident fund?
An SMSF must pass three tests:
- the fund must have been established in Australia during the SMSF Setup phase (the ATO accept this is when the initial contribution to start the fund is paid to and accepted by the trustees in Australia) or at least one asset, owned by the SMSF, must be situated in Australia
- the central management and control (CM&C) of the SMSF must ordinarily be in Australia, and
- the SMSF must pass the active member test.
All of the above must be passed and must continue to be met at all times.
The first test is very clear and the ATO accept that a fund established in Australia meets this test once and for all. However, the second and third tests are more complex. We go into detail about these tests below but for those who love the detail there is some good information about this from the ATO in Tax Ruling 2008/9.
What is central management and control?
The important elements of CM&C focus on who, when and where the strategic and high-level decisions are made which must ordinarily be made when the trustees are in Australia.
The ATO hold the view that formulating, reviewing, updating and monitoring the fund’s investment strategy and performance of the fund’s investments as well as deciding on how the fund’s assets are to be used to fund member benefits are high-level decisions.
The trustees can exercise high-level decisions when they are temporarily out of Australia as they are not ordinarily making those decisions when they are overseas. The superannuation laws do state that CM&C is in Australia even if it is temporarily outside Australia for a period less than 2 years. However, it means the trustees must know when they are temporarily leaving Australia vs permanently leaving Australia from the day of departure. A period of absence which is ‘temporary’ is determined on a case-by-case basis. The ATO do consider such things as:
- the intended and actual length of absence in the overseas county
- the intention of the SMSF trustee/director
- has the SMSF trustee/director purchased a home or apartment in the foreign county
- has the SMSF trustee/director continued to own a home in Australia or have any substantial bank accounts or have children being educated in Australia
Warning – there is no two-year safe harbour if the trustees depart Australia with the intention of living overseas indefinitely. The trustees fail the CM&C test from the day they depart Australia. Conversely, trustees may be considered as being temporarily out of Australia beyond the two-year limit. The crucial test is based on the intention of the trustees when they depart Australia and when that intention changes. The two-year rule is just an indicator of what temporary might look like.
The operations of the fund on a day-to-day basis are not considered to be part of the SMSF’s CM&C. Simply buying and selling shares, paying fund expenses, paying member benefits, keeping fund records or gathering information to give to the administrator or the auditor are part of the day-to-day operations of the fund.
What is the active member test?
The active member test is satisfied when:
- there are no active members – generally an active member is an individual making member contributions or a member receiving superannuation guarantee shortfall amount, a rollover or where contributions are made on behalf of the member by an employer, spouse or government i.e. co-contribution.
Hint – if a member is a foreign tax resident when they contribute to their SMSF the member is considered to be an active member at that time. A contribution made on behalf of a foreign tax resident by an employer or other party in relation to a period when the member was an Australian resident does not make the member an active member.
OR
- a SMSF with active members will satisfy the active member test provided at least 50% of the super balances belonging to all active members at that time belong to Australian tax residents, including pension balances.
How to protect your SMSF
Are you planning to go overseas for an extended period? Please talk to us so we can assist you with your options.
Some things that you can consider, assuming a two-member fund, include:
- Each member to appoint a trusted Australian resident to be their attorney under an enduring power of attorney (EPOA),
- Replace one out of two trustees (or directors of a corporate trustee) with the member’s attorney,
- It is critical that an attorney who is appointed as a trustee/director must have the same powers and responsibilities as any other trustee,
- Ensure the high-level decisions are made in Australia,
- Cease making contributions to your SMSF,
- Cease contributions from employers or other parties or reroute to a public offer fund,
- Do not arrange to receive any rollovers into your SMSF until the members resume their Australian tax residency.
Proposed Legislation
Legislation to relax the residency rules has been proposed in relation to the CM&C of a SMSF. The proposal is to extend the two-year temporary safe harbour rules to five years and remove the active member test. Whilst removing the active member test would allow members overseas to continue contributing to their SMSF the extended temporary safe harbour rules do not overcome the issue with the original two-year rule as the trustee must still ensure the absence is temporary which can be difficult when circumstances change.
The following are based on examples from Taxation Ruling 2008/9
Delegation of trustee duties to another person when the trustees travel overseas
Kate and Andrew are the individual trustees and members of their SMSF, the ‘Kate & Andrew Family Superannuation Fund’. Kate and Andrew travel to England on 1 May 2022 so that Kate can manage her family’s business when her parents became ill. They do intend to return to Australia but are unsure when this will be. They take their children with them and move into Kate’s family home. The children are enrolled in local schools in Liverpool. Kate and Andrew return to Australia permanently on 10 January 2025.
Kate and Andrew formally delegated the following duties to Eric, Andrew’s father:
- monitoring and reviewing the performance of the fund’s investments,
- re-balancing the investment portfolio and
- altering the fund’s investment strategy.
Eric is an Australian resident, and the trust deed permitted the delegation of all or any of the duties and powers of the trustee.
During Kate and Andrew’s absence from Australia, Eric undertook the day-to-day operations of the Kate & Andrew Family Superannuation Fund, and he also undertook the activities listed above without obtaining instructions from Kate and Andrew:
Eric kept Kate and Andrew updated on the fund’s progress but neither Kate nor Andrew participated in any of these high-level decision-making activities whilst overseas.
In these circumstances, the CM&C of the Kate & Andrew Family Superannuation Fund continues to be ordinarily in Australia at all times by virtue of Eric exercising the CM&C in Australia during Kate and Andrew’s absence from Australia.
Trustees exercising CM&C of the fund whilst the trustees are overseas despite delegation of trustee duties to an attorney under an Enduring Power of Attorney
Assume the same facts as the example above, except that Eric is required to obtain Kate and Andrew’s approval before he alters the investment strategy for the fund or re-balances the fund’s investment portfolio. He is also required to provide a report every 6 months to Kate and Andrew regarding the performance of the fund’s investments.
In this situation, the CM&C of the fund is not being exercised by Eric because Kate and Andrew are in effect exercising the CM&C of the fund whilst they are overseas.
CM&C of the fund is ‘ordinarily’ in Australia
Simon and his wife Donna are the trustees and members of their SMSF which was established in Australia. They have an established home in Australia but also decide to establish a second home in an overseas country. The couple and their family spend approximately 6 months at the overseas home and the rest of the year at the Australian home. The majority of trustee meetings are held in Australia at which the strategic and high-level decisions in respect of the fund are made. The CM&C of the fund is only occasionally exercised in the overseas country.
In this situation, the CM&C of the fund is regularly, usually or customarily exercised in Australia and is only being casually or intermittently exercised overseas. Therefore, the CM&C of the fund is ‘ordinarily’ in Australia within the meaning of paragraph 295-95(2)(b) of the ITAA 1997 at all times
Trustees of the fund are outside Australia for a period greater than 2 years, yet the CM&C of the fund is still ‘ordinarily’ in Australia
Joseph and his wife Marian are the trustees and members of their SMSF ‘The J&M Superannuation Fund’. The J&M Superannuation Fund was established in Australia in August 2006. Joseph and Marian exercise the CM&C of the fund at meetings of the trustees at their home in Sydney.
Joseph, who is a chartered accountant, was seconded to his employer’s London office on 1 July 2008 for a period of 2 years. It was always the intention of both Joseph and his employer that the duration of his secondment would actually be 2 years, and that Joseph would return to working in Australia at the expiration of that period. However, due to unforeseen business pressures, Joseph was required to remain in London for an extra 12 months.
His wife accompanied Joseph for the duration of his secondment. They rented out the family home in Australia via their real estate agent and lived in a furnished house in London which was provided by Joseph’s employer. Both Joseph and Marian continued to maintain bank accounts and private health insurance cover in Australia during the period of Joseph’s secondment. They travelled back to Australia for a holiday during the Christmas 2009 period.
During the period of Joseph’s secondment, the CM&C of the J&M Superannuation Fund was exercised at trustee meetings at the house in London.
In these circumstances, it is considered that the CM&C of the fund remains ordinarily in Australia during the period of Joseph’s secondment as the trustees’ absence from Australia was temporary. The factors that support this conclusion include the facts that
- Joseph and Marian intended to return to Australia at the expiration of Joseph’s 2 year period of secondment and never abandoned that intention,
- the entire period of the absence, including the additional 12 months, was related to the fulfilment of a specific purpose,
- they did not establish a home outside Australia and
- they continued to maintain their home and other assets in Australia which indicates a durability of association with Australia.
Accordingly, the CM&C of the J&M Superannuation Fund remained ordinarily in Australia during the period that the trustees were in London.
Change of intention
Assume the same facts as above except that Joseph abandons his intention to return to Australia at the expiration of the 2 years and continues to work in the London office of his employer on an indefinite basis. The trustees continue to exercise the CM&C of the fund in their London home during this extended period. After 3 months however, Joseph and his wife return to Australia because of the illness of one of Joseph’s parents.
In this situation, the first 2 years of the trustees’ absence from Australia is for a defined (temporary) period during which the trustees maintained their intention to return to Australia. However, from the time that the intention of the trustees changed so that they decided to remain overseas indefinitely, that is at the end of the 2-year secondment period, their absence ceased to be temporary. Therefore, it could not be said that the CM&C of the fund was ordinarily in Australia during the 3 months prior to the trustees’ return to Australia.
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