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Self-managed super fund (SMSF) members have a number of options in terms of how to treat their fund when they head overseas. The time they intend to be away is a key factor to consider, as is how many of the SMSF’s members are moving overseas and their percentage of the beneficial interests.
It’s important for trustees and members to be across this as the penalties are pecuniary if they get it wrong. As such, there are calls for Treasury to reconsider these rules.
An SMSF may have a member who is a non-resident for Australian tax purposes, mainly if there are other members who are normal Australian tax residents, whose assets make up more than 50% of the beneficial interests.
“If this is the case, then central management and control is still considered to be inside Australia,” explains James Ridley, a Director and Senior Financial Planner with Atlas Wealth Management.
Ridley notes to remain compliant, an SMSF must satisfy the three residency tests. The fund must have been established, and central management and control must be, in Australia. Alternatively, the fund must have active members who are Australian residents and who hold at least 50% of the beneficial interests.
The rules become complex for people heading overseas temporarily. People may think they can still run their fund from overseas in these circumstances, however the rules may suggest something different.
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“If you are only heading abroad for a temporary period, such as for up to two years, then you can make use of the temporary absence rule. However this rule can be tricky to navigate,” Ridley advises. To stay inside the two-year period, the member must return to Australia inside this time for more than 28 days.
Tracey Scotchbrook, a Director of SMSF advisers Superology, warns the residency rules for superannuation funds present a real issue for SMSFs whose members are abroad – temporarily or otherwise.
Scotchbrook says a common mistake SMSF members make is continuing to make contributions while they are working overseas. This can occur by simply continuing to make cash contributions into the fund or by paying for fund expenses, which are deemed to be member contributions.
“When you’re overseas, it’s essential fund expenses are paid for by the fund during this time and that any cash contributions are made to an alternative superannuation fund such as a retail or industry fund,” she says.
According to Scotchbrook, central management and control presents the biggest challenge for SMSF trustees. In particular, difficulties arise when someone takes a job overseas and no fixed plans are in place to return home.
“Having no fixed date for returning to Australia is often why SMSF trustees fail the central management and control test. Unless it can be clearly demonstrated when leaving Australia that there is a clear intention to be away overseas only temporarily, and plans have been made to return in a specified time, the absence will not be classed temporary,” she says.
If the intention is to depart Australia for an indefinite period of time but the trustee ultimately returns to Australia a short while later (that is, in a period of less than two years) the absence may not be classed as temporary despite the actual duration.
Says Scotchbrook: “In one case the member left Australia indefinitely but, due to an illness in the family, returned to Australia six months later. The fund was found to have failed the central management and control test.”
Becoming a small APRA fund
There are a few options members may consider where the absence is not temporary. However they don’t suit everyone and it is important to seek professional advice first.
The fund may become a small APRA fund and an independent trustee may be appointed. A small APRA fund is similar in many ways to a SMSF, says Scotchbrook. But only trustees registered with APRA can be a fund’s trustee.
“Going down this path, you put your SMSF into the hands of an independent trustee who then becomes responsible for the management of your fund including formulating the investment strategy, managing your investments as well preparing accounts and statutory returns,” she says. There is some administration required in converting the SMSF, but the trustee will help with this, including the finalisation of any SMSF accounts and returns required.
The ATO has said trustees may also delegate their trustee authority to another party. “In doing so, the central management and control would be delegated to a party in Australia and the test satisfied,” Scotchbrook says, although this is a difficult route to navigate.
“Professional legal advice is strongly encouraged to ensure proper mechanisms and documentation are in place, which involves a review of the fund deed and constitution,” she adds. The ATO does not consider simply obtaining professional advice or using an investment manager to constitute delegation of trustee duties.
Also, if the overseas trustee continues to participate in the fund’s strategic decisions, the ATO won’t take the view the delegate is exercising central management and control of the fund.
Enduring power of attorney
Another option is the use of an enduring power of attorney. While all members of an SMSF must be both trustees or directors and also members, superannuation law does allow for an enduring power of attorney to be appointed to step into the shoes of a member. But the SMSF deed must be reviewed to ensure an enduring power of attorney is permitted to act as a trustee. “This sounds like a simple solution but it can be problematic. A question I always ask clients is: ‘are you comfortable handing over the cheque book’? If the answer is no then this is not for you,” says Scotchbrook.
The power of attorney becomes responsible for the strategic direction and high-level decisions for the fund. These include the formulation, review and execution of the fund’s investment strategy and making investment decisions for the fund. “As trustees, they become responsible for the fund’s compliance and can be personally liable for any trustee penalties issued by the ATO,” she adds.
Closing the SMSF
Importantly, members can’t tell the trustee what to do. If they do, they will be performing the central management and control for the fund. Should this occur, the fund might become non-compliant. Closing the SMSF is another option but this may involve tax consequences and an administration nightmare.
Says Scotchbrook: “The fund will need to sell its investments to rollover the member benefits to another superannuation fund. This may trigger capital gains and income tax. The fund will need to ensure sufficient funds are retained to pay the final tax liability on lodgement of the final return.”
Calls for simplification
If all this sounds unduly complex it is, and the Self-Managed Super Fund Association (SMSFA) is calling for the government to simplify the rules.
“We think the active member contribution test should be dropped altogether and the central management control test should be more flexible. At the moment, you either satisfy the definition or you don’t, and if you don’t then the fund is non-complying,” says Peter Hogan, the SMSFA’s Head of Technical.
“This is something we’ve been raising with Treasury since it changed the definitions in 2007. The view is this isn’t a huge problem, so it’s not a high-priority issue. But it doesn’t matter whether there are lots of people failing this test or only a few. It isn’t right that a fund should lose 45% of assets simply because someone happens to be living overseas. This needs to be reviewed as to how this might be avoided.”