There have been many articles written about how an SMSF can maintain its residency status when the members of the SMSF go overseas. However, perhaps not many SMSF trustees are aware of the tax implications of going overseas for a period and then returning to Australia. For an SMSF to maintain its complying status and receive concessional tax treatment, the SMSF must be a resident regulated superannuation fund at all times throughout the financial year.
The three tests that must be met for an SMSF to maintain its residency status are:
Test 1: The SMSF must be established in Australia or have any of its assets situated in Australia. This test is easy to meet if the initial contribution was received in the SMSF’s bank account in Australia or if at least one of the assets of the SMSF is in Australia in the financial year the residency status is tested.
Test 2: The central management and control of the SMSF must ordinarily be in Australia. If the person who makes the high level decisions for the SMSF is overseas, as long as the period of absence is temporary, the SMSF will satisfy this test. If this person goes overseas for an indefinite period, then the SMSF will fail this test. Take care with this test as many people believe there is a two year threshold. To be ‘ordinarily’ in Australia whilst being overseas will depend on the trustee’s intent; the substance of their absence; and whether the duration is ‘temporary’. The decision surrounding what is temporary involves consideration of the circumstances of each particular situation.
Test 3: The SMSF does not have any ‘active members’, or if it does have active members, then at least 50% of the superannuation account balance in the SMSF belongs to ‘resident active members’. An active member is one who contributes to their SMSF or has contributions made for them on their behalf (e.g. an employer). So if SMSF members go overseas, it is best they do not make any contributions. If they do, then they need to make sure that their total superannuation balance in the SMSF is not more than 50% of the total superannuation balance of all active members in the SMSF.
SMSF trustees often get this test wrong by measuring the balance in the SMSF of resident members against the balance of non-resident members. It is not the balance of all members, it is the balance of all active members that is measured for this test. To ensure that at least 50% of superannuation balance belongs to resident active members, it will be necessary for each resident member to be classified as an active member by having contributions made for them. If the superannuation balance of resident active members is less than 50% of the total balance of all active members, or resident members with at least 50% of the total balance fail to make a contribution while a non-resident does, the active member test would not be satisfied.
Failing the residency test
Once an SMSF fails the residency test it becomes a non-complying superannuation fund. Then, all of its assets accumulated over the years of its existence, less any member contributions (where no tax deduction has been claimed) plus earnings on investments received in the financial year that the SMSF becomes non-compliant, are taxed at a flat rate of 45%. Each year the SMSF remains a non-resident (non-complying) fund, the income will also be taxed at a flat 45%.
Another thing that people may not be aware of is what happens when the SMSF members return to Australia, and their SMSF changes its status from a non-resident SMSF back to a resident SMSF. In such case, the above formula takes effect again and all of the fund’s assets, less any members’ contributions to the non-resident SMSF, are included in the assessable income of the SMSF in the year it becomes a resident SMSF. The SMSF is taxed at either 45% (if the SMSF members return to Australia during the financial year) or 15% (if they return to Australia for the full financial year). Each year the SMSF remains a resident (complying) SMSF it will continue to receive the concessional tax treatment of 15%.
If you don’t seek advice on your SMSF before you depart it can be quite detrimental to your life savings if you go overseas and later return to Australia. You could end up paying 45% tax on your SMSF’s accumulated assets twice.
Monica Rule worked for the Australian Taxation Office for 28 years and is the author of The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Fund in Plain English.