Do you have SMSF trustee clients who love to travel? Sounds like a great lifestyle, however while they’re planning their summer break it may pay to remind them that they need to be aware that there can be negative consequences if they are out of the country for too long.
SMSF trustee clients who are considering relocating overseas for an extended period need to be aware that the residency status of their SMSF, its compliance status and its ability to receive tax concessions may be affected.
Preventing an SMSF becoming non-compliant
If an 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 that must be taken 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
- An “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, is the danger the ATO may conclude 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, your SMSF client could consider the following options:
- Appoint a legal personal representative with an enduring power of attorney (who could, for example, be one of their adult children) to be trustee in place of them. They will have the same power as a trustee, they will make key decisions and take responsibility as the original jet-setting trustee cannot be seen to be making high-level decisions. If they are involved in high-level decision-making from overseas, central management and control will be seen to have remained with them which in the eyes of the regulator will constitute a breach of the rules
- 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 they are overseas they may still find themselves 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 a trustee is overseas and unreachable, as they may be required to sign documents. A possible solution to this is for them to receive all communications through email, but your client needs to 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 paperwork.
If the central management and control of an SMSF is permanently outside Australia, the trustee will not meet the “ordinarily” requirement and their 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 their place if they breach the active member test.
Make sure your client has addressed or at least given thought to these issues if you find out they are planning to relocate overseas for an extended period. Read more from the ATO on SMSFs and the residency rules here.
SMSF clients going OS? Tips to keep them compliant. SMSF clients going OS? Tips to keep them compliant. SMSF clients going OS? Tips to keep them compliant. SMSF clients going OS? Tips to keep them compliant.