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Self Managed Super Fund (SMSF) Article
SMSFs and Non-Resident Members
By Tony Negline.
This article may be out of date.
8th March 2006
A super fund will receive income tax concessions if it is a “resident regulated super fund” and is also a “complying super fund”.
The word “regulated” means that a fund's trustees have irrevocably elected to be bound by the super laws. If a fund follows all those laws (or doesn't get caught breaching the laws!) then the fund is deemed to be a “complying”.
The final issue which determines access to tax concessions is “residency”. If a fund is deemed to be non-resident then it will loose its tax concessions. In the first full financial year that a fund looses its residency status then it will be taxed at 48.5%. This tax rate will apply to the market value of the fund's assets less undeducted contributions at the start of that year. The 48.5% tax rate will then be applied to the income of the fund for each full year that it continues to be non-resident super fund.
If an Australian is living and working overseas for extended periods and using a Self Managed Super Fund, the residency status of the super fund is obviously very important because no one would want these extortionate tax rates applied to their super investments. Recently the new Commissioner of Taxation, Michael D'Ascenzo, told a super industry gathering that ATO research shows that trustees have not understood their obligations regarding the residency of a super fund.
So when will a super fund be deemed to be a resident for income tax purposes? There are four conditions and each condition must be met. Firstly, the trust must be a super fund. Secondly, the fund must have been established in Australia and an asset of the fund must be in Australia. Furthermore, the central management and control of the fund must be in Australia or the fund's trustee is temporarily absent from Australia. Finally, if a fund has any “active” members then the assets of those active members are more than 50% of a fund's total assets. These active members must also be a resident under Australian the income tax laws.
We need to explore each of these points in some more detail.
It will be a question of fact whether or not a trust is a super fund. Equally it will be question of fact whether a fund was established in Australia and a fund asset is based in Australia.
The next issue we need to determine is central management and control. This must be based in Australia. As a SMSF is run by a trustee, this means the trustee must be in Australia. Some people think it may be possible for a trustee who is overseas to ask someone to act on their behalf using a power of attorney. This can seem like a neat simple way around this problem. However often when you look behind these arrangements, the attorney is merely acting under the trustee's direction. In other words management and control is not in Australia.
If a trustee returns to Australia on a fairly regular basis then it may be possible to ignore the central management and control issue. To satisfy this specific requirement the trustees must be able to return to Australia every two years for a continuous period of 28 days or less. However in DIY Super's experience most Australians working overseas have no certainty about how regularly they will return here.
Finally the issue of active membership. An active member is defined as a member who is personally making contributions to the fund or contributions are being made for them (for example, by an employer). As noted above the market value of the assets backing active members must be more than 50% of a super fund's total assets.
The active members must be a resident under our income tax laws. A number of tests are used to work out if a person is a resident for tax purposes. Further details are available from the ATO website (www.ato.gov.au).
Most people who are living and working overseas fail either because they can't satisfy the central management or control issue or because they are unable to return to Australia at least every two years.
How is a trustee meant to solve these issues if they are about to leave Australia? In reality there are really only two ways.
Firstly, the trustee has to resign and in their place a new trustee who holds a Registrable Superannuation Entity (RSE) license is appointed. When this happens the fund ceases to be a SMSF and becomes a “Small APRA Fund”. The ATO cease to regulate the fund (except for tax issues) and as the fund name suggests, the Australian Prudential Regulation Authority – APRA – becomes responsible for supervising the fund and its trustee. There are a small number of companies who provide this service such as Perpetual Trustees, Trust Company of Australia and Australian Wealth Management.
If the super fund members then return to Australia permanently and want to make the fund a SMSF again then they would ask the RSE licensee to resign.
An alternative solution to the problem is to wind the fund up and transfer the assets to another super vehicle such as a retail super fund.
If a super fund currently fails the above tests then they should seek expert assistance as they may already be potentially open to significant penalties.
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