In my recent Super Day 2019 presentation (yes, the rumours are true, I dressed up as the Terminator), one of the issues we explored was the failure of an SMSF to comply with the residency rules, potentially resulting in the loss of its status as an Australian complying superannuation fund.
This can have a significant financial impact on the SMSF as it means that in the first year of non-compliance, the entire SMSF’s assets (less non-concessional contributions) are taxed at 45%, and for every later year of non-compliance, the assessable income of the fund continues to be taxed at the highest marginal tax rate.
For an SMSF to be an Australian resident complying superannuation fund:
- It must be established in Australia; and
- The central management and control (CM&C) of the fund must ordinarily be in Australia. This requires more than simply having an Australian resident appointed in place of the overseas member to attend to day to day management. The high-level decision making such as exercising discretions and formulating investment strategies must be undertaken here – no rubber stamping; and
- The fund must satisfy the ‘active member’ test, in that there are no active members or 50% of the total entitlements of the fund are held by active members who are Australian residents.
So what can you do if work, love or life takes you overseas for an extended period?
Well, to satisfy the active member test, do not contribute to the SMSF whilst overseas.
If there is a genuine intention to return to Australia, the CM&C can shift overseas temporarily for a period of up to 2 years. But this is a subjective test, and risky in a world where employment opportunities take us all over the globe.
A common strategy to ensure CM&C remains in Australia, is for an attorney under an Enduring Power of Attorney document to be appointed in place of an overseas member at trustee level. That is, the overseas member resigns as an individual trustee and the attorney is appointed instead, or the attorney is appointed as an alternate or replacement director of a corporate trustee. This decision ought not to be made lightly, as the person going overseas loses control of the SMSF, and the attorney stepping into that person’s shoes takes on significant responsibility at a personal level.
Alternatively, if the intention is to relocate overseas long term or permanently, winding up the SMSF may be a sensible option.
Even if you still call Australia home, if you are relocating overseas for a while, it is imperative that you take steps to ensure your SMSF remains compliant to avoid dramatic tax consequences, and that the documentation and processes put in place are tailored to your specific circumstances.
*Peter Allen’s 1980 song ‘I Still Call Australia Home’ would have to be up there with Men at Work’s ‘Down Under’ released the same year, as one of the most iconic songs for stirring up feelings of patriotism and nostalgia amongst ex-pats after a few bevvies