Why geography matters for your super fund

SMSF technical expert and columnist for The Australian newspaper
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The residency of your super fund is very important.  If for some reason your fund loses its residency status at any stage during a financial year it’ll face very severe tax penalties.

Three rules to satisfy

In the main your fund will be a resident super fund if it satisfies all of the following three rules:

  • 1. The fund was established in Australia or any fund asset is situated in this country; and
  • 2. The central management and control of the fund is in Australia; and
  • 3. The fund’s resident has no active members, or if it has active members, then the assets of resident active members are more than 50% of all assets of active members (active members are, in general, those members who receive or make super contributions during a financial year).

How does the ATO deal with these issues at a practical level?  Many people ask the Tax Office for a Private Binding Ruling about their particular circumstances.

When is a fund not a resident fund?

In one particular case, a couple were both born overseas and emigrated to Australia more than 10 years ago.  One had become an Australian citizen the other hadn’t.  They operate a business through a company which makes employer contributions to their SMSF.

The couple intend to travel overseas during three financial years and will return to Australia permanently.  During their holiday they’ll travel on tourist visas and have no intention of working overseas.  Whilst overseas they will live off their accumulated savings.  They will manage their business via the internet and organise to have business related postage scanned into an electronic format and made securely available via the internet.  They will appoint a person to provide administrative services.

At this point in time they don’t know precisely how long they’ll be away.

Of less importance to us, the couple asked the ATO if they would personally remain residents for income tax purposes. The ATO concluded they would be.

The couple also wanted to know if their super fund would remain a resident super fund.

The ATO said no for the following reasons:

  • Their fund was established in Australia so that rule was ok;
  • What about central management and control (CM&C)?  The Tax Office noted that CM&C will be deemed to be in Australia if most of a fund’s trustees are overseas for less than two years.

In this particular case the ATO decided the fund trustees manage and control their fund – which of course they’re meant to do. Importantly they intend to continue performing this role whilst overseas on holiday. (They will do this in the same way they plan to run their business.)

The Tax Office concluded that they won’t be away for a short period of time and have no definite date of return to Australia and as a result the CM&C of the fund is overseas.

Therefore the fund doesn’t satisfy the CM&C requirement whilst the members are away from Australia.

As the fund doesn’t satisfy this rule there is no need to worry about the active member test.

Consequently the fund wouldn’t be a resident super fund whilst the members are on their overseas holiday.

The ATO also pointed out that any employer contributions made by their company to their SMSF wouldn’t be tax deductible and wouldn’t satisfy the Super Guarantee obligations because the employer knows that the fund isn’t a resident super fund and hence is a non-complying super fund.

As you can see the issue of residency for your super fund is a very important issue – and quite specific.  If you are contemplating travelling overseas on an extended basis, it is probably a good idea to seek a private ruling from the ATO.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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