SMSFs and overseas residency

Establishing a SMSF may be simple but trustees need to understand the rules if they intend moving offshore, writes Paul Sarkis.

Trustees of self-managed superannuation funds (SMSF) who are moving overseas for an extended period need to be aware of the rules that determine the fund’s residency status and the associated tax implications.

Background

Only funds that meet the definition of ‘Australian superannuation fund’ (ASF) are eligible for concessional tax treatment. This definition will be met if:

• the fund was established in Australia, or at least one fund asset is located in Australia;
• the central management and control of the fund is ‘ordinarily’ in Australia; and
• the ‘active member’ test is satisfied.

In TR2008/9, the Australian Taxation Office (ATO) provided detailed guidance on meeting these tests.

SMSF established in Australia

A SMSF is established in Australia when the initial contribution is paid to and accepted by the trustee(s) in Australia. It’s not necessary for the trust deed to be signed and executed in Australia.

If the fund was not established in Australia, it will satisfy the test if at least one fund asset is situated in Australia at the relevant time.

Central management and control

The central management and control (CMC) of a fund involves a focus on the who, when and where of the key strategic decision making processes and activities of the fund. These include:

• formulating the fund’s investment strategy;
• reviewing and updating the fund’s investment strategy, as well as monitoring and reviewing the performance of the fund’s investments;
• formulating a strategy for managing reserves; and
• determining how the fund’s assets are to be used to pay member benefits.

Activities that form part of the fund’s day-to-day operations (eg, the acceptance of contributions) do not generally constitute CMC.

In some situations, a fund’s CMC may be outside Australia for a period of time. In general, the fund will still meet the ‘ordinarily’ requirement if its CMC is temporarily outside Australia for up to two years.

Furthermore, the fund can still meet this requirement even if the CMC is temporarily outside Australia for more than two years. However, if the CMC is permanently outside Australia for any period, this requirement will not be met.

To comply with the CMC test, non resident trustees are able to appoint a power of attorney who is an Australian resident to make key strategic decisions.

The fund’s trust deed should allow for such a delegation of authority and the attorney must make the strategic decisions independently of the fund trustees.

Example one

Elizabeth and Edward are members and trustees of their SMSF. Their trust deed allows for the delegation of trustee duties. They move to England indefinitely to manage a business and sell their Australian home.

While overseas they decide to delegate their trustee duties (such as altering the fund’s investment strategy) to Elizabeth’s sister, Mary, who is an Australian resident. Mary undertakes these activities without referring to Elizabeth or Edward.

In this case, CMC continues to be ‘ordinarily in Australia’ at all times. If, however, Mary sought their permission to undertake her delegated duties, the CMC is not ‘ordinarily in Australia’ as it is exercised from overseas.

The active member test

This test is satisfied if, at the relevant time:

• the fund has no ‘active members’; or
• at least 50 per cent of the total market value of the fund’s assets are held by active members who are Australian residents; or
• at least 50 per cent of the fund’s value (net of exit costs) is attributable to active members who are Australian residents.

A member is considered active if they contribute to the fund or contributions are made on their behalf. A member is not considered active if:

• they are a non-resident;
• they are not a contributor at that time; and
• the only contributions made to the fund on their behalf since they became a non-resident were made in respect of a time when they were an Australian resident.

Example two

Karen is a member of a two-member fund that meets the first two tests. The fund's assets are split equally among the members. She goes overseas for 18 months and ceases to be an Australian resident. She doesn’t make any super contributions while overseas and no contributions are made on her behalf.

The remaining member remains an Australian resident and continues to receive super contributions. Since at least 50 per cent of the assets are attributable to active members, the third test is also met.

Options for SMSF trustees

If the SMSF is likely to fail the ASF definition, trustees could consider:

• converting to a small APRA fund (with an APRA-approved trustee);
• transferring non-resident member benefits to a public offer fund; or
• appointing an Australian resident power of attorney to act in place of the non-resident trustee(s) if they would otherwise fail the CMC test.

Consequences of non-compliance

If the fund does not meet these tests, the total assets (less non-concessional contributions) may be taxed at 45 per cent. The fund may also lose tax concessions in future years.

Moving overseas will not necessarily mean the SMSF needs to be wound up. With careful planning, the fund can remain an ASF. However, trustees should seek professional advice before a member goes overseas permanently or temporarily for two years or more.

Paul Sarkis is head of technical services at MLC.