Self Managed Superannuation Funds and the importance of Australian Residency

Last update - 11 August 2020 By Charity Bru

Residency, in relation to a self-managed super fund, is very important. To be a complying super fund and receive the concessional rates of tax available in super, an SMSF needs to be classified as a resident regulated fund at all times during the year.

To be a complying super fund and receive the concessional rates of tax available in super, an SMSF needs to be classified as a resident-regulated fund at all times during the year. This means that the fund needs to meet the definition of an Australian superannuation fund for tax purposes.

What makes an SMSF an Australian resident?

In order for any superannuation fund to be designated as an Australian resident, it needs to meet all three of the following conditions:

  1.  The fund needs to have been established in Australia, or at least one of the fund’s assets is located in Australia
  2. The Central Management and Control of your fund is ordinarily in Australia
  3. The fund satisfies the ‘Active Member Test’.

What are the consequences if a superannuation fund is deemed to be a non-resident?

The consequences are quite severe. The fund immediately becomes a non-complying fund, which means that not only does the fund not have access to the concessional tax rates (15% in accumulation phase and 0% in pension phase), but the income AND assets (less certain contributions) of the fund are taxed at the highest marginal tax rate – currently 45% not including Medicare levy of 2%! Losing half of the value of your fund can be a scary prospect.

How do I ensure that my fund is, and remains, an Australian resident?

You do this by meeting all three of the conditions mentioned above. To elaborate:

1. Fund is established in Australia, or at least one asset located in Australia

To meet this condition, firstly the trust deed must be signed and executed in Australia and secondly, money or other property is transferred into the fund as an initial contribution and is accepted by trustee. Other property can include both real property and shares.

2. Central Management and Control

The central management and control of your fund refers to the strategic, high level decision making processes of the fund. These include activities like formulating an investment strategy, reviewing the performance of the fund’s investments or determining how assets are to be used for member benefits.

These activities need to be conducted in Australia for the fund to be deemed a resident of Australia. However, in some situations a fund’s central management and control may be outside of Australia for a period of time. In general, your fund will still meet the requirement if its central management and control is temporarily outside Australia for up to two years. If the central management and control of the fund is permanently outside Australia for any period of time, this two year ‘rule of thumb’ will not apply.

3. The Active Member Test

The third test that must be satisfied for a fund to be an Australian superannuation fund is the ‘active member’ test. This test is satisfied if the fund either has no active members or the active members are Australian residents who hold at least 50% of:

  1. The total market value of your fund’s assets attributable to super interests, or
  2. The sum of the amounts that would be payable to active members if they decided to leave the fund

A member is an ‘active’ member if either they or someone else is making contributions to the fund on their behalf.

Frequently asked questions:

I’m heading overseas for a secondment, around 2 years, but I fully intend to return. What do I do? Will my fund be classified as a non-resident if I head overseas for more than two years?

The central management and control of a fund is decided on a case-by-case basis. There have been cases where trustees have exceeded their stay overseas by more than two years, but the fund was deemed to remain an Australian resident. In these cases, the trustees were always intending to return to Australia, and this was proven by virtue of not selling their family home, keeping bank accounts and assets. The fund was deemed to still have the central management and control ‘ordinarily’ in Australia despite the longer absence, and therefore still qualified as a resident fund.

I’m heading overseas and I don’t intend to return. What do I do with my existing SMSF?

You have a couple of options here. The simplest thing to do is to transfer your existing super to an external fund, such as a retail or industry fund, and have it managed by a third-party trustee. Then wind up the SMSF.

If you really want to keep your SMSF for various reasons (e.g. because there is an asset/s in the fund that you don’t wish to or can’t sell), you do have the option of appointing another individual/s who will remain Australian residents to be the trustee and legal personal representative of your fund, via an enduring power of attorney. You will need to cease to be a trustee (or a director, if the fund has a corporate trustee) and the new individual/s appointed. Having a corporate trustee makes this process much easier, so you might also be interested in reading whether you should use individual or corporate trustees in your SMSF.

Always make sure that your SMSF deed allows this before going ahead! By appointing another trustee/director, and making sure that they operate and control the fund’s decisions on a high-level basis, you’ll be able to make sure that your SMSF still qualifies as an SMSF as well as retaining its Australian residency.

Please be aware that this will give those you choose to be trustee power over the management and operations of your superannuation fund, so it’s imperative that you choose people that you trust.

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