Trustees need to ensure their SMSF is an Australian SMSF. SMSF’s that breach the residency rules are taxed, not at the concessionary rate of 15%, but at the marginal tax rate of 45% (plus Medicare Levy of 2%), so make sure that your SMSF is a resident Australian SMSF. Trustees can set up and manage a Self-Managed Superannuation Fund from overseas if they are outside Australia for a temporary period. The ATO’s temporary absence rules generally allow a Trustee to be overseas for no more than 2 years, though exceptions can be made in certain circumstances.
What is the test for Residency?
The SMSF should meet the following three criteria:
- The SMSF was established in Australia, or at least one of the SMSF’s assets must be located in Australia; and
- The central management and control of the SMSF are ordinarily undertaken in Australia; and
- At least 50% of the SMSF Membership must be in Australia, measured by market value (the Active Member test).
Criteria 1: Fund establishment in Australia
An SMSF is established in Australia when the initial contribution to the SMSF is paid to and accepted by the Trustees in Australia. The Trust Deed does not have to be signed and executed in Australia. If an SMSF was not established in Australia, it will still satisfy the test if at least one asset of the SMSF is situated in Australia.
Criteria 2: Central management and control
According to the ATO, the central management and control of an SMSF involves a focus on the high-level decision-making processes and activities of the SMSF. The SMSF will be resident where the central management and control takes place.
Criteria 3: The Active Member test
The third test is the ‘active member’ test. This is satisfied when at least 50% of the market value or Fund value is held by active members who are Australian residents.
More information
For more information on super fund residency rules, you can view the ATO guidance on SMSF residency by clicking here.
The ‘2-year rule’
The central management and control of the SMSF can be taken as ordinarily in Australia even if it is temporarily outside Australia for periods of not more than 2 years. Unfortunately, the 2 year rule is sometimes misunderstood: to clarify it is not an exception available to all Trustees irrespective of the facts and intentions surrounding their absence. If an absence is permanent, the 2 year rule does not apply. Even an absence of less than 2 years could be ‘permanent’ and the central management and control could, therefore, be outside Australia (e.g. if a Trustee or Trustees departed with the intention of being away indefinitely but returned after only 18 months due to ill health). Conversely, in certain situations, an absence of more than two years may be acceptable. This could be the case, for example, a Trustee, leaving the country with the intention of being away for a defined period of less than two years in order to fulfill some specific purpose, was forced to remain overseas due to unforeseen circumstances. In a case such as this, the ATO would normally be satisfied that central management and control of the SMSF continued to be ordinarily in Australia. If 50% of the Trustees are in Australia and 50% overseas, the central management and control of the fund is in Australia if both sets of Trustees equally participate in exercising the central management and control; however, the ATO takes the view that this would rarely be the case.
Power of Attorney
Trustees can still be part of an SMSF even if they are overseas on a permanent basis. This is made possible by taking out a Power of Attorney for the management and control of the SMSF. Whilst overseas, Members are not allowed to contribute to the SMSF. The ATO’s ruling on this (Private-Ruling-on-Residency-Status-EPOA ) sets out all the requirements for a POA.
Conclusion
Moving overseas will not necessarily mean the SMSF has to be wound up. With careful planning, the SMSF can remain as an Australian SMSF. Trustees should seek professional advice before going overseas permanently or temporarily for two years or more. Feel free to contact us for your queries on SMSF residency.
Frequently Asked Questions
What will happen if an SMSF fails to meet Residency Rules?
Trustees are required to disclose the status of their Fund to the ATO through the SMSF early engagement and voluntary disclosure service. If the Fund is no longer considered an Australian superannuation fund, this would be reported in the Tax Return. The ATO will then issue a Notice of Non-compliance to the Fund and for every year the Fund remains non-complying, the highest marginal tax rate will apply. To determine whether an SMSF has received a Notice of Non-compliance, Trustees can perform a search on the Super Fund Lookup website.
How does failure to meet Residency Rules affect audit outcomes?
As the Fund has ceased to be an Australian superannuation fund, Auditors are not required to lodge an Auditor Contravention Report (ACR) to solely report this violation. However, when an SMSF no longer meets the definition of a ‘complying superannuation fund’, there is a substantial risk that the ATO will issue a Notice of Non-compliance in the future and the notice will be backdated to the year when the Fund became non-complying. This change in the SMSF’s status becomes a ‘key audit matter’ as defined in Auditing Standard 701, which requires it to be described in the Independent Auditor’s Report. Additional details may also be provided in a management letter addressed to the Trustees. ATO’s advice on this matter can be viewed here.
What are the tax implications if an SMSF is listed as non-compliant?
If an SMSF fails to qualify as a complying superannuation fund, it may result in the ATO issuing a Notice of Non-Compliance. Tax consequences of receiving such a notice are:
- In the year it becomes non-complying, the assessable income is taxed at the highest marginal tax rate of 45%, plus 2% Medicare Levy. The assessable income includes an amount equal to the market value of the fund’s total assets less any contributions the Fund has received that are not part of the taxable income of the fund.
- For every year the Fund remains non-complying, its assessable income is taxed at the highest marginal tax rate.
To determine whether an SMSF is complying, Trustees can perform a search on the Super Fund Lookup website.
