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Self Managed Super Fund (SMSF) Article
Residency Status of SMSFs
By Tony Negline.
This article may be out of date.
23rd May 2007
A super fund will receive income tax concessions if it is a “resident regulated super fund” and a “complying super fund”.
The word “regulated” means that a fund's trustees have irrevocably elected to be bound by the Superannuation Industry Supervision laws. If a 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 that it appears because 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 it will be taxed at 46.5%. 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 a non-resident super fund.
So when will a super fund be deemed to be a resident for income tax purposes? There are four conditions all of which must be met before a fund can determine if a fund is a resident fund:
- Is it a super fund? This is a question of fact; only a very badly created and structured super fund would fail this requirement.
- Where was the fund established and is an asset based in Australia? This is also a question of fact whether a fund was established in Australia and a fund asset is based in Australia. In reality all a super fund needs to do is to keep open a 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.
- Central management and control must be based in Australia.
As a SMSF is run by a trustee, this means the trustee must be in Australia. It appears that because of the Corporations Act it may be possible for a corporate trustee who is overseas to ask someone to act on their behalf using a Power of Attorney. This may be a neat simple way around this problem. For legal reasons it appears that an individual trustee cannot use a Power of Attorney.
Under old law if a trustee returned to Australia every two years for a continuous period of at least 28 days then it was possible to satisfy this central management and control issue.
Part of the government’s super reforms have created a new rule which replaces this old rule. This new rule says that central management and control is “ordinarily” in Australia. It appears that a two year absence is okay but we don’t know if temporarily returning to Australia will also work.
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.
- Active Membership
Under the old rules an active member was defined as a member who personally made contributions to the fund or contributions are being made for them (for example, by an employer). The new rules say that a super fund member will be an active member if contributions are being made by them or if the member is a non-resident and contributions are made for the member for a period of time when they were a resident.
As noted above the market value of the assets of resident active members must be more than 50% of the assets of all active members in a super fund.
The resident active members must be a resident under our income tax laws. The immigration or citizenship status of the members is not important. 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).
How can a super fund ensure it remains a resident super fund?
In reality there are only two ways. Firstly, the trustee has to resign and in their place a new trustee who holds a Registrable Superannuation Entity (RSE) license must be appointed. The fund ceases to be a SMSF and becomes a “Small APRA Fund”. As the fund’s name suggests, the Australian Prudential Regulation Authority – APRA – becomes responsible for supervising the fund and its trustee.
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 and appoint themselves as individual trustees or appoint a company that they are directors of as trustee. When this occurs APRA must be informed that it will not longer be regulating a super fund and the ATO are also told that a fund has ceased to be a Small APRA Fund and has become a SMSF they have another fund to supevise.An alternative solution to the problem of failing the residency test is to wind the fund up and transfer the assets to another super vehicle such as a retail super fund. Upon returning to Australia the investors could again establish a SMSF and transfer their funds back into that investment structure.
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