28/07/2015

What is happening to your Self Managed Superannuation Fund back at home whilst you are overseas? A closer look at how your trip abroad could impact on the residency of your superannuation fund and its ability to be a complying Australian superannuation fund.

The Members of a Fund went out one day,
Over the hill and far away,
The ATO said,
Well will you look at that
This Super Fund is a bit out of whack.

Recently the Australian Tax Office has issued a number of Private Binding Rulings on the circumstances that may affect the residency of Self Managed Superannuation Funds. If a fund does not have Australian Residency then it cannot be deemed a complying fund.  This would result in the assessable income being taxed at 47% and there is a one-off additional tax bill, of close to half the assets of the fund, in the year that a fund is deemed non-complying.

There is a three prong residency test to be an Australian Superannuation Fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997. A fund must meet all three.
1.    Established in Australia or assets held in Australia at that time.
2.    Central Management and Control ordinarily in Australia.
3.    Active Member test.

The expectation is that a fund will be made non-complying when it fails to meet part of the criteria, however the ATO has a discretion and the intention of the parties to maintain their funds complying status is quite valuable in instances where one or more of the criteria temporarily lapses.

Here are three cases where the ATO has allowed a fund to remain an Australian Superannuation Fund despite the criteria not always being clearly met. A key consideration in each case was the ability to show that the time overseas was temporary, there was an intention to return to Australia after it, and the central management and control of the Fund remained in Australia.

Whether or not contributions were made was another factor. The active member test can be met by having no active members or having active members and at least half of the fund’s assets are attributable to active members or the superannuation interests of the active members are held by Australian residents.

Case 1
•    Two member fund – Member 1 is sent overseas for work and Member 2 accompanies. Member 1’s employer provides letter substantiating the employment assignment.
•    Both members intend to return to Australia at the conclusion of the assignment.
•    The assets of the fund are Australian listed securities, holdings in mutual investment funds and cash in Australian bank accounts.
•    Whilst the members are overseas there will be little managerial activity in the fund.
•    The members intend to return to Australia once during this period and have arranged to meet with their accountant to attend to managerial tasks.
•    Residency is maintained, contributions continue to be made, and the members remain as Australian residents for tax purposes.

Case 2
•    Two member Fund, members are also trustees.
•    Member 1’s employment sends him overseas for two years and Member 2 accompanies. Both intend to return to Australia several times a year.
•    The Fund’s strategic and high level decision making process will continue to be carried out in Australia, and the investment strategy of the Fund will continue to be developed in Australia.
•    The strategy is well developed and isn’t attended to frequently.
•    There will be no contributions from members whilst overseas and their Australian residence will be rented out, their bank accounts and health insurance will be up kept and they will rent a property overseas. No ‘home’ will be established.

Case 3
•    Two member fund, members are directors of the corporate trustee.
•    Both members went on an extended holiday overseas. They were aware that they had to be back within 2 years to avoid a residency issue for their SMSF.
•    Unforeseen circumstances overseas have prevented their return to Australia.
•    They have no established address overseas and will return to Australia as soon as they can.
•    Fund correspondence has been directed to their accountant, who liaises with them online. Members have remained in full control electronically. Fund assets are primarily direct investment accounts, listed shares and units listed in unit trusts.
•    No contributions have been made whilst overseas. Members have maintained professional registrations, bank accounts and share holdings within Australia.

The ATO has a wide ranging discretion in how they apply this test to funds and they will exercise that relative to how the fund trustee approaches the rules.

So here are a few ‘Townsends top tips’: Be aware of the residency rules, apply them to your fund and if you discover a breach, report it yourself; don’t wait until the ATO cracks down on you!

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.