For your SMSF to be complying, it must be an ‘Australian Super Fund’. You want your fund to be complying as this means it qualifies for concessional tax rates. A complying fund is taxed at 15%, a non complying fund is taxed at 45%
An SMSF is an Australian super fund if it meets three residency conditions:
- Establishment or assets held in Australia
- Majority of ‘active assets’ are held by Australian residents
- The ‘central management and control’ of the fund is in Australia.
Let’s examine each of these test in more detail:
Test 1 – Australian Super Fund
This is easily determined as it is highly unlikely an SMSF has been established outside of Australia. It is deemed to be ‘established in Australia’ if the initial contribution to set up the fund was paid and accepted in Australia.
If for some reason the SMSF was not established in Australia, if the SMSF holds an asset within Australia it will meet the test.
Test 2 – Active Member
An ‘active’ member is one that has had contributions and/or rollovers received by the fund on their behalf.
To meet the test there must be at least one active member at any time during the applicable financial year and the resident active members’ balance must be at least 50% of the total active member’s accounts in the fund.
If a member has temporarily left Australia, make sure there are no contributions being made on their behalf (to avoid having an ‘active’ non-resident member), to ensure the 50% test is met.
Whilst rollovers are not counted as contributions normally, for the purposes of the active member test, they will be considered contributions to the fund.
Test 3 – Central Management and Control
‘Central Management and Control’ as determined by the ATO means “…. strategies and high level decision making processed and activities of the fund”. This includes the formulating, reviewing, updating and variation of the fund’s investment strategy and monitoring investment performance.
The central management and control must take place ‘ordinarily in Australia’.
‘Ordinarily in Australia’ means that those temporarily overseas can still exercise the central management and control of the SMSF and meet the residency test. The temporary status was commonly defined as no more than two years. However, the laws are now more focused on the intention and substance of a trustee’s time overseas rather that a strict time line. If a trustee is overseas for say six months, but there are no obvious signs of intention to return (no return ticket, they sell their residence in Australia)- then this would not be considered a temporary stay overseas, and they would fall foul of this test. It also can be said that a stay by a trustee overseas for longer than two years may still be considered temporary. For example, a trustee may go overseas with the intention of being less than two years but due to unforeseen circumstances they are required to remain outside of Australia longer than 2 years. The ATO may still deem that the central management and control remains ordinarily in Australia as the overseas stay is still temporary in nature.
If you are a trustee of an SMSF and are going overseas you should speak to an SMSF specialist as there are some options you can consider in relation to managing and maintaining your retirement savings.
Mark Chapman is the Director of Tax Communications at H&R Block.