Are you an SMSF trustee who loves to travel? Sounds like a great lifestyle, however while planning your summer break you need to be aware that there can be negative consequences if you are out of the country for too long.
If you are a trustee and you relocate overseas for an extended period, the residency status of the SMSF, its compliance status and its ability to receive tax concessions may be affected.
Prevent your SMSF becoming non-compliant
If your SMSF becomes non-compliant it will lose its concessional tax rates (non-compliant funds are taxed at the highest marginal rate). There are three practical considerations you must take care of to retain compliance in these circumstances, however the first of these is relatively easy to satisfy.
- The fund must be deemed to be an “Australian” fund, which for most (if not every) SMSF will be satisfied as the initial contributions are likely to have been made and accepted by the trustee/s in Australia.
- Central management and control of an SMSF is required to be in Australia
- The active member test must be fulfilled.
Central management and control in Australia
If high-level decisions – such as the formulation of an investment strategy or how assets are used to fund member benefits – are made outside of Australia, trustees need to show that “central management and control” of their SMSF is “ordinarily” in Australia and only temporarily conducted from overseas.
In general, an SMSF will still meet the “ordinarily” definition if its central management and control is temporarily done from offshore (“temporarily” being deemed to be for up to two years).
One thing to note however, if the absence is not of a temporary nature, it may be concluded that the fund’s central management and control is not “ordinarily in Australia” prior to the elapse of a two year period.
In the event that the “ordinarily” requirement cannot be satisfied, consider the following options:
– Appoint a legal personal representative with an enduring power of attorney (who could be one of your adult children for instance) to be trustee in place of you. They will have the same power as a trustee, they will make key decisions and take responsibility as you cannot be seen to be making high-level decisions. If you are involved in high-level decision-making from overseas, central management and control has remained with you and will constitute a breach of the rules (and be aware that the ATO can monitor email trails to ascertain if this has happened)
– Wind up the fund and roll benefits over into a retail/industry fund
– Convert the SMSF into a small APRA fund.
Administrative duties are also imposed on trustees, so although you are overseas you may still find yourself needing to sign financial statements. An SMSF with up to two members needs to get all trustees to sign documents, and one with more than two members must have at least two signatures.
Make use of the digital world to cover the distance
Problems will arise if you are overseas and unreachable, as you may need to sign documents. A possible solution to this is to receive all communications through email, but be sure to check that digital signatures can legitimately be used. Or perhaps use an administrator for the fund as they can be responsible for receiving and processing all your paperwork.
If the central management and control of an SMSF is permanently outside Australia, you will not meet the “ordinarily” requirement and your fund may be deemed non-compliant with significant tax consequences.
Active member test must be fulfilled
A member is classified as active if they are a financial contributor to the fund or if financial contributions to the fund have been made on their behalf. One way to satisfy the “active member test” is to ensure that no contributions are made to the SMSF by a non-resident member.
Alternatively, the “active member test” requires that at least 50% of all assets (either based on market value or the value payable to members) are attributable to active members who are Australian residents. It would be pointless to appoint a legal representative to stand in your place if you breach the active member test.
Make sure you address these issues if you are planning to relocate overseas and also seek professional advice to maintain the residency status of your SMSF. Read more from the ATO on SMSFs and the residency rules here.