SMSF and residency
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
If you have an SMSF and are going overseas you may need to act
If you’re heading overseas to live and have a self-managed superannuation fund (SMSF), you may need to do something for your fund to maintain its complying status – which your fund needs for concessional tax treatment.
Basically, your SMSF must be an ‘Australian Superannuation Fund’ which requires it to satisfy three tests (at all times), otherwise the fund may be taxed at 45 per cent.
The three tests are the establishment test, the central management and control (CMC) test and the active member test.
It hinges on ‘residency’ which may be a problem if you leave the country for an extended period to take up a job, undertake an education opportunity or for some other reason.
Test 1 – Establishment test
This test is satisfied if the fund was established in Australia or has an asset in Australia.
Test 2 – Central management & control test
This test looks at who and where the strategic, investment related and main decisions – the high-level decision-making processes and activities – are made as the CMC of the SMSF must ordinarily be in Australia.
The physical location of the trustees when making these decisions determines where the CMC is located. However, the concept of ‘ordinarily in Australia’ allows for decisions to be made by someone temporarily overseas. That is, if CMC is ‘temporarily’ outside Australia – a period of two years or less (safe harbour) – it’s still considered ordinarily in Australia.
An SMSF with an equal number of trustees in Australia and overseas making strategic decisions will generally satisfy this requirement.
Test 3 – Active member test
This test is relevant where a member who is a non-resident for Australian tax purposes contributes to their SMSF. Rollovers are treated as contributions for this purpose.
The active member test is met if the fund has no active members, otherwise the test requires Australian resident members for whom contributions are made to have at least 50 per cent of the total market value of the fund’s assets attributable to all active members or be entitled to at least 50 per cent of the benefits payable to all active members if exiting the fund.
An active member is one who makes contributions or has contributions made to the fund on their behalf.
So, if a fund has any non-resident active members, their balances cannot exceed 50 per cent of balances attributable to all active members.
If the majority of SMSF members move overseas and CMC won’t be temporarily outside Australia, action needs to be taken.
1. Use an Enduring Power of Attorney (EPOA)
Your legal personal representative (LPR) holding an EPOA who is an Australian resident can be appointed as trustee/director in accordance with the trust deed (individual trustees) or company constitution (corporate trustee).
Your LPR acts in their own capacity as trustee/director – not as your agent – and is responsible for any civil and criminal penalties for any SMSF breaches.
You must resign as trustee/director and have no further ongoing strategic involvement in the decision making of the fund as this is done by your LPR (the new trustee/director).
Your LPR must agree to the appointment in writing, cannot be a disqualified person, and must sign a declaration stating they understand their duties no later than 21 days after being appointed.
Importantly, the trust deed must allow you to be a member of the fund without being a trustee as it’s common for deeds to require all members to be trustees.
For corporate trustees, the CMC may be satisfied by appointing an alternate director. If your LPR (holding an EPOA) is appointed as an alternate director, you don’t cease to be a director. The alternate director exercises your powers – and is personally liable for the decisions they make – when you’re not performing your duties.
Provided there isn’t a majority of members overseas, the CMC will be satisfied where all members participate in the significant policy decisions of the fund. So, it may not be necessary for all overseas members to resign.
Take Ric and Chrissy who have an SMSF and move overseas to work indefinitely. Both have executed an EPOA in favour of Ric’s brother, Joe. Ric and Chrissy both resign as trustees and Joe is appointed as trustee for Ric and separately appointed as trustee for Chrissy. As the strategic and high-level decision-making processes and activities of the fund are made by Joe in Australia, the fund meets the CMC test.
Alternatively, if only Chrissy resigns and appoints Joe who actively participates in the CMC of the fund, an equal number of trustees would be in Australia and overseas and the CMC test would be met.
2. Become a small APRA fund (SAF)
You could convert your SMSF to a SAF by appointing an approved trustee so that the CMC resides in Australia. This change of trustee is not a CGT event, but the approved trustee may restrict the type of assets the SAF can invest in – and it may cost more to run.
The active member test must still be met.
When you come back to Australia the SAF can change back to a SMSF.
3. Roll over to a public offer fund
Your SMSF can be wound up and benefits rolled over to a public offer fund, but there is potential CGT on the disposal of assets. Also, not all assets can be transferred, e.g. real property, but you can contribute as the active member test is no longer an issue.
In the 2021-22 Federal Budget, the Government proposed relaxing the residency requirements for SMSFs by extending the CMC test safe harbour from two to five years and removing the active member test for both SMSFs and SAFs – allowing members to continue contributing while temporarily overseas. The start was 1 July 2022, but never became law.
The new Government’s recent Budget confirmed the residency changes are still alive but deferred commencement until the start of the financial year after it becomes law.
Meanwhile, SMSF members going overseas must consider the CMC requirement and, if they become a non-resident resident, the active member test.
*The information in this document (information) has been prepared by Fitzpatricks Private Wealth Pty Ltd (ABN 33 093 667 595, AFSL 247 429) (Fitzpatricks). The information is of a general nature only and does not take into account the objectives, financial situation or needs of any person. Before acting on the information, investors should consider its appropriateness having regard to their own objectives, financial situation and needs and obtain professional advice. No liability is accepted for any loss or damage as a result of any reliance on the information.