To be a complying fund and receive the tax concessions we all associate with super, an SMSF – like all superannuation funds –must be classified as an Australian superannuation fund. Yet this definition becomes more complicated to meet when SMSF members move overseas. When this happens, trustees need to know what, if any, action they need to take to make sure their fund remains compliant.
Section 42 of the Superannuation Industry (Supervision) Act 1993 (SISA) provides that an SMSF needs to be a resident regulated super fund at all times during a financial year to be a complying fund. A “resident regulated super fund” is defined in section 10 of the SISA as a regulated super fund that is an Australian superannuation fund under section 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997). The definition of an “Australian superannuation fund” within the meaning of the ITAA 1997 is applicable from 1 July 2007 and comprises three tests, which we commonly refer to as residency tests.
A fund must satisfy all three of these tests at the same time in the relevant income year to be considered an Australian superannuation fund. The three tests are:
- Test 1: The fund must have been established in Australia, or hold at least one asset in Australia.
- Test 2: The central management and control of the fund must be ordinarily in Australia.
- Test 3: Either the fund has at least 50% of the total superannuation balances of all active members held by active members who are Australian residents, or the fund has no active members.
First Test : Fund Establishment & Fund Assets
This test requires that either the fund was established in Australia or any asset of the fund is situated in Australia. A fund is established in Australia if the initial contribution received by the fund (either as cash or inspecie), including rollovers, is paid and accepted by the fund trustee in Australia. If a fund satisfies this test at the time of its initial set up, this test will always be satisfied.
Second Test : Central Management & Control (CM&C)
The second test requires the central management and control (CM&C) of the fund to be “ordinarily in Australia”.
What is CM&C?
The CM&C relates to the fund’s strategic and high-level decision making processes and activities. It is important to note that only the fund’s strategic and high-level decision making processes and activities will constitute CM&C, and not its mere day-to-day operations. The strategic and high-level decision making processes includes:
- formulating the fund’s investment strategy
- reviewing and updating or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund’s investments
- formulating a strategy for the prudential management of any of the fund’s reserves, and
- determining how the assets of the fund are to be used to fund member benefits.
Who exercises the CM&C of the fund?
Who is exercising CM&C is a question of fact for each case. In most cases, the trustees of the SMSF will be the entity exercising the CM&C. If another party performs any duties and activities independently and without any influence from the trustees, then that party will in fact be exercising the CM&C of the fund.
In the case of an SMSF with a corporate trustee, a person holding an EPOA granted by a member can either be appointed as a director in place of the member or appointed as an alternate director to the relevant member, provided the fund’s trust deed and corporate trustee’s constitution allow for this.
Third Test : Active Member Test
The active member test requires that at least 50% of the fund’s account balances that relate to active members are held by active members who are Australian residents for tax purposes. An SMSF that has no active members will always satisfy the third test. A member is generally considered to be an “active member” of an SMSF at a particular time if the member is a contributor to the fund at that time or is an individual on whose behalf contributions have been made.
As a general rule, if an SMSF member becomes a non-resident of Australia for tax purposes they should cease contributing to their SMSF to avoid a breach of the active member test. If they still wish to make or receive contributions, then contributions can still be made to a large public-offer fund during the period they are overseas. They can then rollover the contributed amounts to their SMSF when they return to Australia and become Australian tax residents again.
Potential Options available to maintain an SMSF’s residency status
A common solution to meeting the CM&C test is to have one or more of the SMSF trustees/directors grant an EPOA to a person who is physically located in Australia and to appoint this person as a trustee/director in their place for the period they will be overseas.
Other solutions to the overseas travel problem include to:
- wind up the SMSF and transfer the member balances to a larger fund, or
- appoint an approved professional trustee and change the status of the fund from an SMSF to a small APRA fund (SAF). Again, this will satisfy the CM&C test, but the members must still consider the active member test.
If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.
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