On this page
- What is the SMSF residency test?
- What should I do before I move overseas?
- What happens if you breach the SMSF residency rules?
- Can I return to Australia for a week each year to pass the test?
- Do the residency rules differ for those in the retirement phase?
- Can I set up an SMSF while I’m living overseas?
- The bottom line
Growing numbers of Australians spend time living overseas for work or in retirement. If you plan to be one of them and you have an SMSF, you need to be aware of residency requirements. Failure to do so could result in the loss of tax concessions, penalties or the forced winding up of your fund.
The tax concessions available under Australian superannuation legislation are worth protecting, especially for higher income earners on high marginal tax rates. Member contributions and fund earnings in compliant Australian SMSFs are taxed at the concessional super rate of 15%, instead of your marginal tax rate, up to certain contributions limits.
What is the SMSF residency test?
The three residency rules or conditions that an SMSF must meet to be classified as an Australian super fund are listed below.
The initial contribution to set up the SMSF must have been paid and accepted in Australia (or the fund must have at least one Australian-based asset).
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The SMSF’s ongoing management, administration and decision-making must usually be conducted in Australia.
It’s important to remember that all members of an SMSF must also be trustees responsible for ensuring its legal compliance. While trustees can obtain professional advice to help them with SMSF management and compliance, the residency rule cannot be outsourced to a third party.
It is possible for trustee functions to be temporarily done outside Australia for up to two years, enabling fund members/trustees to temporarily relocate.
However, the two-year rule does not apply if central management and control is permanently moved outside Australia, even if you end up staying away for less than two years.
Conversely, if you move overseas temporarily for less than two years and end up staying longer than two years due to events beyond your control, then any mitigating circumstances will be taken into account. See ‘What happens if you breach the SMSF residency rules?’ below.
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The fund’s active members (i.e. members making fund contributions or having contributions made on their behalf) must be Australian residents and they must hold at least 50% of fund assets (or at least 50% of the amounts payable to members).
Alternatively, a fund with no active members that meets residency rules 1 and 2 can still be classified as an Australian super fund.
What should I do before I move overseas?
If you are thinking of moving overseas for an extended period and don’t want to run foul of the ATO, you should probably consider getting professional advice about maintaining your residency status.
To avoid the risk of your SMSF becoming non-compliant due to residency issues, any member who goes overseas for longer than two years should avoid making contributions to your fund (or having any contributions made on their behalf).
Instead, their contributions should be made to a retail or industry super fund. These account balances can be rolled over into an SMSF if and when the member/trustee returns from overseas.
What happens if you breach the SMSF residency rules?
SMSFs that fail to satisfy all three residency rules are likely to be classed as non-compliant by the ATO. This can result in the fund’s assets being frozen and its income (member contributions and investment earnings) being taxed at the highest marginal tax rate (45%).
The ATO also has the power to order a non-compliant SMSF to be wound up and transfer their member’s funds to a public super fund.
However, the ATO will take any mitigating circumstances into account before imposing a penalty on an SMSF that breaches any residency rules, as highlighted by two recent decisions below.
Case study 1
The COVID-19 health crisis has resulted in many countries imposing travel bans and restrictions and a high degree of uncertainty around international travel.
After temporarily residing overseas for less than two years, a couple were about to return to Australia but became stranded overseas because of the COVID-19 health crisis. This forced absence meant they would be out of Australia for more than two years.
If the individual trustees of an SMSF or directors of its corporate trustee are stranded overseas due to COVID-19, in the absence of any other changes in the SMSF or the trustees’ circumstances affecting the other conditions, the ATO has stated “We will not apply compliance resources to determine whether the SMSF meets the relevant residency conditions”.
Case study 2
A husband and wife were trustees of their own SMSF. They divorced, and the husband subsequently relocated overseas for two years and eight months. This put their SMSF in breach of residency rule 2.
The ATO could potentially have taxed the fund’s income retrospectively at the highest possible rate for each of the three financial years the husband was away. This would have resulted in a one-off tax bill of more than 50% of the value of assets in the SMSF.
However, the ATO decided not to impose a tax penalty after taking account of these three factors:
– The husband and wife voluntarily disclosed the breach
– The husband was terminally ill
– The super benefits of the couple were subject to a Family Court order as part of their divorce settlement.
Can I return to Australia for a week each year to pass the test?
If you’re living overseas for an extended period (i.e. more than two years), returning to Australia for a week each year won’t satisfy residency rule 2 (i.e. that the ongoing management and decision-making of the fund occurs in Australia).
In addition, if you make contributions to your SMSF during this time, you’ll be in breach of residency rule 3 (i.e. that an SMSF’s active members must be Australian residents). You wouldn’t be an Australian resident for tax purposes while you’re living permanently or for an extended period overseas, which means you wouldn’t be entitled to super tax concessions via your SMSF.
Do the residency rules differ for those in the retirement phase?
No. As income from SMSF funds in the retirement phase is tax free, a breach of any of the three residency rules can result in the ATO removing this tax-free status.
You can be eligible to be an active member of an SMSF (i.e. make contributions) even when you’re in retirement phase, but you still need to satisfy SMSF residency rule 3 (i.e. be an Australian resident).
And even if you’re not making SMSF contributions and are spending your retirement years travelling, it’s important that you don’t stay away from Australia for longer than two years. Otherwise, you won’t comply with SMSF residency rule 2 (i.e. that the ongoing management and decision-making of the fund occurs in Australia) and will risk the tax-free status of your pension.
You can’t simply avoid this issue by not receiving pension payments while you’re living overseas for more than two years. That’s because there are minimum annual pension payments that you must receive to comply with super legislation. This amount depends on your age, as indicated in the table below.
On 22 March 2020 the federal government announced that the minimum pension drawdown rates would be halved for the 2019/20 and 2020/21 financial years. The rates below show the temporary rates for 2019/20 and 2020/21, and the normal rates for preceding years.
|Age of beneficiary||Temporary percentage factor|
(2019/20 and 2020/21)
|Normal percentage factor|
(2013/14 to 2018/19)
|65 to 74||2.5%||5%|
|75 to 79||3%||6%|
|80 to 84||3.5%||7%|
|85 to 89||4.5%||9%|
|90 to 94||5.5%||11%|
|95 or more||7%||14%|
Source: SIS Act
Can I set up an SMSF while I’m living overseas?
Yes, provided that you’ll return to live in Australia within two years of setting up your SMSF.
Australian superannuation legislation provides generous tax concessions for compliant super funds, but there are three residency rules that an SMSF and its members/trustees must satisfy to be eligible for these concessions. Failure to satisfy any of these rules can result in your SMSF having its assets frozen or its income taxed at the top marginal rate of 45%.
The information contained in this article is general in nature. It’s best to seek independent professional advice to determine how the residency requirements apply to your specific SMSF circumstances.
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