We have recently received questions around SMSF residency rules and what funds need to do, in order to remain compliant.
The rules haven’t changed since TR 2008/9 were released in December 2008, with some professionals still under the misconception the residency status is reset if the trustee/s came back to Australia for a period of 28 days. This was removed when the new SMSF residency rules were finalised in 2008/9.
For a superannuation fund to maintain its SIS legislation complying status and the concessional tax rate there are three tests to be passed at all times during the financial year:
1. The fund is established in Australia or an asset of the fund is situated in Australia
2. Central management and control is situated in Australia
3. The active members’ test.
An active SMSF member makes contributions whether they are concessional or non-concessional. For a fund to pass this test, there must be no active overseas members during the year or they must form a minority of the SMSF membership. Please note: Rollovers are considered as contributions for the active member test.
For central control and management to be situated in Australia a majority of the trustees/directors must reside in Australia. This is the hardest test to manage with SMSF trustee/s going abroad.
There is still much confusion in the industry about the temporary absence rule which changed back in 2009. With the 28-day reset rule within a two-year period being removed, trustees can still leave Australia for a period of up to two years, but the rules now look at the intent of the departure.
If John & Janet Smith of Smith Family Superannuation Fund went on an extended overseas holiday or signed a work contract to work overseas for 18 months and the intent was to come back to Australia within a two-year period, the Central Management & Control test is satisfied. This position could be further strengthened by the trustee/s maintaining their residence in Australia while abroad.
But, if an SMSF trustee signs a three-year overseas work contract they fail the test as soon as they leave the country. Even if they come back to Australia within a two-year period, the intent at the time they left the country was to be away for a period of two years.
Clients travelling who will be unable to satisfy Central Management & Control Test but wanting to maintain their SMSF while living overseas should:
- Appoint someone as their superannuation power of attorney. This person would then become the trustee or director of the trustee company and therefore become responsible for the ongoing operation of the fund and compliance with SIS legislation.
- This needs to occur prior to the member leaving Australia and appropriate advice was given to both the member and the incoming trustee/director as the member is effectively handing control and management of the SMSF over.
If the client is working overseas and wants to make further contributions or rollovers they could consider making these to an industry or retail fund. When they return to Australia the accumulated amount in the industry/retail fund can then be transferred to the SMSF.
This is a complex area, and without professional advice, your SMSF clients are at risk of failing to meet the three tests, which would result in their SMSF being classified as non-complying and taxed at the highest marginal tax rate.
If this article has raised questions regarding your clients and any of the above issues, contact John Lethbridge, SMSF Specialist Advisor on 1800 333 143.