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Self Managed Super Fund (SMSF) Article
Tax trap lurks in non-resident super status
By Tony Negline.
This article may be out of date.
18th March 2009
In early November last year we discussed a draft Tax Ruling dealing with the residency of superannuation funds.
This tax ruling was finalized in mid December 2008 and the completed ruling contains some new information which provide new understanding of how super funds might become a non-resident super fund.
If a super fund is declared to be a non-resident super fund then very large tax penalties will apply. In the first full financial year that a fund looses its residency status it will be taxed at 46.5%. This tax rate will apply to the market value of the fund's assets less contributions not claimed as a tax deduction at the start of that year.
The 46.5% tax rate will then be applied to the income of the fund for each full year that it continues to be a non-resident super fund.
Yes that's right a total tax bill of 71%.
When potential severe tax penalties for some area of the law are pointed out, it is common to hear someone say, "Oh yes, that's all well and good but the authorities have to be reasonable and I'm not doing anything beyond normal logical human behaviour." A slightly more sophisticated version of this is to say that a Court wouldn't apply such penalties if someone did not set to deliberately do the wrong thing.
Unfortunately this view often won't work. Most of the super and related tax laws don't care about your motivations or circumstances. In relation to resident and non-resident super funds the tax rules apply the above penalties and provide no one – courts, politicians, tax administrators – with any ability to determine otherwise.
A super fund will be an Australian Super Fund – that is, a resident fund for tax purposes – if three tests which must be met:
- Where was the fund established or is any asset of a fund based in Australia?
- Is the central management and control of a fund based in Australia?
- Does the fund have any resident active members?
The tax laws say that a super fund only needs to satisfy these three rules at a particular time during a financial year in order to secure a fund's residency status. This means that technically these rules could be satisfied for only one day during a financial year to ensure access to residency status.
However there is another requirement which is often overlooked about the residency status of a super fund and the associated access to tax concessions. Specific super laws say that a fund must satisfy the three 'limbs' of the Australian Super Fund definition at all times during a financial year before tax concessions can be assured. So a fund might be an Australian Super Fund but not for a whole year which means the penalty tax rates would apply.
One common strategy that small super fund trustees use to satisfy the "central management and control" requirement is by appointing a power of attorney.
Under the Corporations Act a director of a corporate trustee may delegate their duties to another person.
The ATO's final ruling says that life is not so simple for super fund's with individual trustees. The delegation of individual trustee's responsibilities will only happen if the fund's governing rules or relevant state or territory trust legislation allows it.
The ATO's says that, the Queensland legislation allows a trustee to delegate their powers by using a power of attorney even if their super fund's governing rules prohibit the delegation.
In the Northern Territory, South Australia and Tasmania, the relevant legislation allows an individual trustee to delegate their duties unless the super fund's governing rules specifically prohibits it.
In New South Wales, Victoria and Western Australia individual trustees can delegate their duties unless "a contrary intention is not expressed in the fund's governing rules".
The ATO point out that in practice the central management and control will not be delegated if "the trustee continues to participate in the strategic and high level decision making and activities of the fund". However "the trustee may continue to participate in such activities by reviewing or considering the decisions and actions of the delegate before deciding whether any further action is required."
What is the process of appointing this delegate? According to the Macquarie Group it may be best for the member trustee to resign and formally appoint the person holding the Power of Attorney. For super funds with individual trustees the ownership of fund assets will all have to be change to include the new trustee.
Finally it has been expected that the financial market turmoil would cause a rush of investors who are unhappy with their current superannuation arrangements to set up their own Self Managed Super Fund. At a recent Institute of Chartered Accountants seminar for its members the Tax Office revealed that it is currently setting up some 20% more small super funds than it was 12 months ago.
Steps in appointing an enduring power of attorney for individual trustees:
- The attorney must be appointed in writing
- The member trustee should resign as trustee of the super fund or be removed in accordance with the fund's governing rules
- The attorney should be appointed in accordance with the fund's governing rules (there is maximum time limit for this appointment under super laws)
- The attorney must consent in writing to their appointment as trustee
- The fund's assets should be transferred from the old trustee to the new trustee
- This process would be reversed when the member(s) returns to Australia (again there is a maximum time limit for this reappointment under super laws)
- The attorney must be allowed to be the trustee of a super fund
- The attorney must not be paid for their super fund trustee duties
Source: Macquarie Group
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