SMSF Tips & Traps for Australian Expats

Self-Managed Superannuation Funds (SMSFs) have been a popular structure for many Australians, however we’re often speaking with Australian expats wondering what to do with them now that they’re no longer residing in Australia. This is where it can start to get quite complicated, which is why this week we’re exploring the requirements for a Self-Managed Super Fund and what you should consider as an Australian expat.

Firstly, it’s important to realise that to be a complying superannuation fund and enjoy concessional tax treatment, the SMSF must satisfy the ‘residency test’ at all times.

What is the residency test?

The residency test will be an issue for those who depart Australia permanently and have an SMSF, and may also cause issues for members who intend to depart Australia for an extended period of time to travel or work overseas.

Understanding the residency test is important as there can be significant adverse tax implications for SMSFs who fail the test. They can lose concessional tax treatment and pay tax on income at the highest marginal rate, which is currently 45%. You can quickly see the significance of this consequence, particularly as income and capital gains are usually taxed inside superannuation at 15%.

Further, in the year the fund first fails the residency test, its income will include the market value of the assets less any non-concessional contributions at the start of the year. This means that you could potentially lose up to 45% of the value of your SMSF in tax alone.

Have we got your attention now?

Demonstrating residency for an SMSF to meet the residency test, it must be considered an “Australian Superannuation Fund” and satisfy the following three requirements at all times during the year.

Requirement 1 – SMSF Established in Australia

The fund was established in Australia, or any asset is situated in Australia. This test will be met if the initial contribution made to establish the fund was paid to and accepted by the trustee(s) in Australia. The test is also met if any asset of the fund is situated in Australia. For example, if the fund has a bank account that was set up in Australia.

Requirement 2 – Central Management Control (CMC)

The central management and control of the fund is ordinarily in Australia. The ATO’s view on the central management and control is covered in Taxation Ruling TR 2008/9 “The meaning of Australian Superannuation Fund”. The central management and control is generally performed by the trustee(s) and relates to the strategic and high-level decision-making processes and activities of the fund, including:

• Formulating the investment strategy for the fund;
• Reviewing and updating or varying the fund’s investment strategy as well as monitoring and
• reviewing the performance of the fund’s investments;
• How to meet the ‘central management and control’ requirement.

What if I’ve not left Australia permanently?

You could also consider establishing that the absence is only temporary.  The central management and control of a fund can still be ordinarily in Australia even where it is temporarily outside Australia, provided the person or persons who exercise the central management and control are absent from Australia for a relatively short period of time.

Temporary absence is determined by the intention of the members, supported by the facts of the situation, such as employment contracts, the location of assets and family. Temporary absence must also be determined objectively and on a real-time basis, that is, it cannot be established in retrospect. For example, where a member departs overseas to fulfil a specific passing purpose, such as the completion of a two-year employment contract, this would support the absence is temporary.

Taxation Ruling TR 2008/9 includes examples (specifically example 6, 7 and 8) that assist with determining when the central management and control is “ordinarily in Australia”. It would be recommended that trustees document the circumstances of their departure to establish the temporary nature of their absence.

What other options do I have do meet this requirement?

One key option is establishing Enduring powers of attorney (EPOA). This is to delegate the central management and control to another person. An enduring power of attorney can give the person nominated the power to replace the delegator as trustee (or director of the corporate trustee) and make decisions on behalf of the fund. It is important to note that having a power of attorney alone doesn’t provide the nominated person with the power to act as trustee, they must also be formally appointed as trustee of the fund (or director in the case of a corporate trustee). The power of attorney can be restricted to decision making powers for the fund only.

Requirement 3 – Active Member Test

The fund has no active members, or where there are active members, at least 50% of the market value of fund’s assets attributable to active members, are held by active members who are Australian residents for income tax purposes.

Active members are those in receipt of contributions or rollovers to the fund. The “active members test” requires that a fund either has no active members or, where the fund does have at least one active member, that 50% of:

• The total market value of fund assets that are attributable to active members; or
• The sum of withdrawal benefits payable to active members is attributable to active members who are Australian residents for income tax purposes (tax resident).

This generally means that the SMSF should not accept contributions from members whilst overseas and who are not considered a tax resident, unless the fund has tax-resident active members who hold a majority member balance.

Some members may choose to direct their contributions to a public offer fund whilst overseas and not a tax resident. They may then consider a rollover from the public offer fund to their SMSF, once they return to Australia and become a tax resident.

What should I do if I have an SMSF?

Ideally, you would deal with residency before you leave Australia. It is important that residency issues are dealt with prior to trustees leaving Australia, as it may be too late to put in place the appropriate solution after the trustees have left or after their subsequent return.

The residency test is one that must be met “at all times” and once failed, cannot be rectified retrospectively, which may result in significant adverse tax consequences. If you’re planning to be outside of Australia, consider whether it may affect your SMSF’s ability to meet the residency test.

If you’ve already left Australia and have an SMSF in place, be sure to reach out and seek advice as soon as practical to ensure that you’re not faced with a surprise tax bill that you’re not expecting.

If you’re in doubt or have any questions at all, contact Ally Wealth Management for professional advice before you leave.

A plan is only effective if you act on it.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.