Think twice before living overseas

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It’s becoming increasingly popular in this globalised world to be offered work overseas and while there are many benefits to heading offshore for a while, the one thing it won’t benefit is your self-managed super fund (SMSF). Put simply, you can’t run an SMSF while ‘living’ overseas.

It’s not necessarily a reason to stay put in Australia, but it highlights the need to plan what you intend to do with your super wisely.

SMSFs enjoy generous tax concessions provided they meet specific rules and maintain their investments and dealings according to super legislation. A core feature is that it must be a ‘complying super fund’, which means that it meets the ‘residency test’, and doesn’t breach the super legislation or its trust deed during the year.

Why is SMSF residency important?

If the SMSF fails the residency test at any time, it becomes non-compliant. The market value of the fund’s assets (less non-concessional contributions) will be included in the assessable income of the SMSF and taxed at the highest marginal tax rate. This will be the case for each year the SMSF remains non-complying.

Let’s take a look at what the residency test involves.

Passing the residency test

The SMSF must be an Australian superannuation fund by meeting all three of the following conditions:

1. The SMSF is established in Australia or any asset of the fund is situated in Australia

A superannuation fund is established in Australia if the initial contribution made to establish the fund is paid to and accepted by the trustee of the fund in Australia. However, it isn’t necessary to sign and execute the fund’s deed in Australia.

Once it’s determined that a fund was established in Australia, it will satisfy this test at all times. The fact that no asset of the fund is situated in Australia doesn’t affect this conclusion.

If the SMSF wasn’t established in Australia, it will still satisfy this test if at least one asset of the fund is situated in Australia at the relevant time. The location of an asset is determined by the type of asset and the common law rules for determining the location of assets.

2. The central management and control (CM&C) of the fund are ordinarily located in Australia

CM&C refers to strategic and high-level decision making and activities of the fund, such as formulating the investment strategy and reviewing investment performance. Operational or administrative tasks don’t constitute CM&C. If you’re living overseas for an extended period of time, chances are you’ll be making these decisions overseas as well – that is, you won’t pass this test.

However, the trustee will only be exercising the CM&C of the fund if the trustee actually performs the high-level duties in practice. If the trustee delegates the activities to another person who performs them without influence from the trustee overseas, then that person is seen to be exercising CM&C of the fund.

The legislation uses the word ‘ordinarily’. The CM&C of the SMSF is regularly or usually in Australia if there is continuity or permanence. Temporary exercise of CM&C won’t prevent it from being ordinarily in Australia at a particular time.

As a rule of thumb, ‘temporarily’ is seen as a period of no more than two years. However, individual SMSF circumstances, such as the intention of absence defined in advance or a change in situation, can determine whether the CM&C is ordinarily in Australia.

3. The fund has no active members, or active members who are Australian residents hold at least 50% of:

  • the total market value of the assets attributable to super interests; or
  • the sum of the amounts that would be payable for active members if they leave the fund.

A member is an active member of a superannuation fund at a particular time if the member is a contributor to the fund at that time or is an individual on whose behalf contributions have been made.

A member isn’t an active member of the fund if:

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

What to watch out for

SMSF members travelling overseas should obtain advice on how to maintain SMSF residency during their absence from Australia.

Considerations may include delegating independent CM&C to a person in Australia to ensure that the CM&C continues to be exercised in Australia. Documenting the intention of temporary absence, the length of time outside of Australia, and the extent to which Australian assets have been divested will assist in determining whether the CM&C test is satisfied.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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