Budget 2022- SMSF residency

Changes to Superannuation Residency Rules – Budget 2021-2022 Announcement

For individuals with a self-managed superannuation fund (‘SMSF’), the Government has announced several changes to the residency requirements of maintaining a SMSF, which will ensure that more SMSF’s maintain their complying status whilst members are overseas.

What are the current residency requirements for a SMSF?

With COVID-19 international travel bans, and the move towards global lifestyles, it is more likely that members of an SMSF may go overseas during part of a financial year – risking their concessionally taxed retirement savings. For an SMSF to be considered a complying super fund and receive tax concessions, the SMSF needs to be an Australian super fund at all times during a financial year. Where the residency rules are not met, the SMSF may become non-complying - which can result in assets and income being taxed at the highest marginal tax rate.

Currently, an SMSF is considered an Australian super fund if it meets all three of the following residency conditions:

1.  The fund was established in Australia, or at least one of its assets is located in Australia.

2.  The central management and control of the fund is ordinarily in Australia

         a.  This means the SMSF’s high level strategic decisions are made and performed in Australia. These activities include:

                       i.     Formulating the investment strategy of the fund

                       ii.     Reviewing the perform of fund investments

                       iii.     Formulating a strategy for the prudential management of any reserves, and          

                       iv.     Determining how assets are to be used for member benefits

         b. Currently, there is a temporary 2-year absence rule where trustee/members conduct central management and control temporarily outside of Australia.

3. The fund either has no active members or it has active members who are Australian resident and who hold at least 50% of either:

         a. The total market value of the fund’s assets attributable to super interest, or

         b. The sum of the amounts that would be payable to active members if they decided to leave the fund

Central Management and Control of the fund ordinarily in Australia

The central management and control (‘CM&C’) of an SMSF required understanding who, when and where the strategic high-level decisions are made and where high-level activities of the fund are conducted. It should be noted that day-to-day activities of the SMSF will not be considered CM&C, as these activities are mostly formalistic or administrative rather than strategic.

To determine ‘who’ exercises CM&C of an SMSF, we look to the trustee – either individual, group of individuals, or director/s of a corporate trustee. The mere legal responsibility to exercise CM&C however does not constitute CM&C. The trustee needs to actually be making strategic decisions and conducting high-level activities of the fund for it to be considered part of CM&C. In some situations, trustee’s powers can be delegated to another person (such as a properly executed Enduring Power of Attorney) who may instead carry out CM&C.

In relation to the ‘temporary 2-year absence’ rule, it should be noted that the CM&C can be outside for a period greater than 2 years, as long as the period of absence is temporary.

The ‘active member’ test

For the purposes of this test, an active member is defined as a member who makes contributions to the fund or has contributions made on their behalf (eg. Employer contributions). A member cannot be an active member if:

• The member is a foreign resident
• The member is not a contributor at the test time
• The only contributions made to the fund on the member’s behalf since the member became a foreign resident were made in respect of times when the member was an Australian resident

In our experience, we have seen the active member test cause issues for family SMSFs where parents and adult children are in an SMSF together. The parents balance often constitutes more than 50% of the balance of the SMSF. The parents then go overseas, and the adult children continue to make contributions to the SMSF. As a result, when the active member test is applied, the adult children who are considered active members do not have at least 50% of the value of the fund’s assets.

What are the proposed changes to residency requirements for SMSFs?

The Government announced during its 2021-2022 Budget announcement that it proposed to make the following changes:

• Remove the ‘active member test’ entirely, and
• Extend the ‘temporary’ absence rule for CM&C purposes to 5 years

These changes will allow members of SMSF overseas to continue contributing to their superannuation funds whilst temporarily overseas, and access the concessional tax treatment in superannuation. This will align with flexibility and contributions rules that members of large APRA-regulated funds have access to.

These changes are expected to come into play from 1 July 2022 after amending legislation has received Royal Assent.

How can Tax Controversy Partners help you?

If you are currently stuck overseas, considering a permanent move overseas and have large balances in a SMSF, it is important that you understand your member/trustee obligations. We can help you to ensure that your SMSF remains complying and that no penalties are imposed.

At Tax Controversy Partners, our experienced lawyers can assist you with advice on setting up an SMSF, residency queries and SMSF audits. Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.