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Self Managed Super Fund (SMSF) Article
Look out for resident super fund tax pitfalls
By Tony Negline.
This article may be out of date.
5th November 2008
The current global economic conditions are causing a small but statistically significant number of Australians to either return to or leave our shores in search of work.
If any these people run or are thinking of running their own super fund they need to be careful as the fund might face excessive tax rates.
A super fund receives income tax concessions if it is a “resident regulated super fund” and a “complying super fund”.
A super fund is “regulated” if the fund's trustees have irrevocably elected to be bound by the superannuation laws.
If a super fund follows all those laws (or doesn't get caught breaching them) then the fund is deemed to be a “complying superannuation fund”.
But what test is used to determine if a super fund is a resident fund? The answer to this question is more important than it appears because if a fund is deemed to be non-resident it will loose its tax concessions.
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.
If a fund returns to being a resident super fund then it will again face 46.5% tax on the fund's assets.
So when will a super fund be deemed to be resident for income tax purposes? There are three key questions that must be answered positively at the same point in time during a financial year:
- 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?
In order to answer these questions a super fund trustee has to take into account a number of issues and questions.
The answers to the question where was the fund established and is an asset based in Australia can be factually determined.
In reality all a super fund needs to do is to keep open an Australian bank account (or other similar type of financial product) with a nominal amount in the account in order to have an asset based in Australia.
What about central management and control? The tax laws demand that this is based in Australia.
In a draft tax ruling the Tax Office says that at law the trustee has the legal responsibility to exercise the central control and management this does not, of itself, mean the trustee is actually performing this role.
The ATO has expressed the view that determining where the central management and control involves a "focus on who, when and where of the strategic and high level decision making and processes and activities of the fund". This includes working out who formulates, reviews and updates a fund's investment strategy. Where the day-to-day administrative functions are performed is irrelevant.
It appears that because of the Corporations Act it may be possible for a director of corporate trustee who is overseas to ask someone to act on their behalf using a Power of Attorney. For legal reasons an individual trustee cannot use a Power of Attorney.
The law allows a trustee to be temporarily absent for up to two years but potentially still deemed to be in Australia. The ATO says that "the duration of the absence must either be defined in advance or related (both in intention and fact) to the fulfilment of a specific, passing purpose".
Most Australians working overseas have no certainty about how long they will be away from this country and hence it may be dangerous for someone living and working in Australia to assume that they will be able to satisfy this particular rule.
The final issue that must be dealt with is the active member test.
A super fund member will be an active member if the member is making contributions to the fund. A person will also be an active member if contributions are being made for them and they aren't a resident and they also fail a couple of other rules.
The residency mentioned here refers to residency under Australia's income tax laws which often has nothing to do with the immigration or citizenship status. 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).
A fund will pass the active member test if it has no active members.
Another way to pass this test is if the market value of the assets of resident active members held in the fund is more than 50% of all active member assets in the super fund.
A fund may also pass the active member test if at least 50% of monies payable to active members if they all left the fund is attributable to super interests held by resident active members.
There is no question that these rules are complicated. They require careful and deliberate assessment.
The cost of determining compliance with the rules will be costly for all concerned including the tax office.In July 2007 the government increased the tax office levy on small super funds by 233%. It would come as no surprise if this levy had to be increased to cover the costs of paying to supervise all the opaque super rules like the super fund residency tests.
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