As owners of self-managed superannuation funds (SMSFs) are likely aware, the Australian taxation and superannuation regime is complex and constantly changing.
A SMSF can benefit from concessional tax rates of 15% of assessable income (subject to balance cap limits) if it satisfies the complex requirements to be a complying superannuation fund under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). Failure to satisfy the SIS Act requirements can have significant negative consequences for an SMSF including the risk of being taxed at 45%.
One of the requirements which SMSFs need to satisfy to be a complying superannuation fund is it needs to be an Australian superannuation fund and therefore, the SMSF needs to satisfy a 3-part residency test. Although the 2021–22 Budget announcement proposed changes to the residency test which were intended to apply from 1 July 2022, no changes have come into effect at the time of writing.
In this article, Rebecca Edwards, SMSF Specialist Advisor explore the current requirements for the SMSF residency test.
For a SMSF to be resident in Australia, and therefore an Australian superannuation fund, the trustee must demonstrate that the SMSF passes the residency test by meeting each of the criteria below.
Test 1 - The SMSF establishment and assets test
The fund must be either established in Australia or any of the fund’s assets must be situated in Australia.
Generally, it should be quite straightforward to ascertain whether this requirement has been met as a fund will be considered to be 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. This requirement is a ‘once and for all’ requirement – that is, once it is determined the fund was established in Australia, it will satisfy the first test at all relevant times. The fact that no asset of the fund is situated in Australia will not affect this.
Importantly, the mere fact that the signatories executed the deed to establish the fund in Australia will not satisfy the criteria– the initial contribution must be paid to and accepted in Australia.
Alternatively, this test can be satisfied where any of the fund’s assets are situated in Australia.
Where the fund cannot meet the requirement of being established in Australia and holds no assets in Australia, it will not satisfy this first test and will not meet the residency requirements.
Test 2 - The central management and control (CM&C) test
To satisfy the second test, the central management and control (CM&C) of the fund must be “ordinarily” in Australia. This test can still be met even if the CM&C is overseas if the absence is temporary. Section 295-95(4) of the Income Tax Assessment Act 1997 (Cth) essentially allows an absence from Australia for no longer than two years if that absence is temporary, and this is often referred to as a ‘safe harbour’. There is often a misconception that the CM&C test will be failed simply because the absence exceeds two years. Importantly, the safe harbour does not mean that the CM&C will be failed if a temporary absence exceeds two years and further an absence less than two years will not automatically be deemed to fall into the safe harbour. It would be more important to establish in all cases, the temporary nature of the absence.
The concept of where CM&C is exercised is not straightforward and can, depending on the particular circumstances, be quite complex. Careful consideration needs to be given to the CM&C test. This will hinge on the facts of each case and consideration will need to be given to a variety of issues including the meaning of the term ‘ordinarily’ and ‘temporary absence’ for example.
The view of the Commissioner of the Australian Taxation Office (ATO), as expressed in the Taxation Ruling 2008/9 (Ruling) is that the CM&C test focuses on the “who, when and where” of the strategic and high-level decision making processes and activities of the fund, focused on the performance of duties and activities of the fund such as:
- formulating the investment strategy;
- reviewing, updating or varying the investment strategy;
- monitoring and reviewing performance of investments;
- formulating a strategy for the prudential management of reserves (where applicable); and
- determining how assets of the fund are to be used to fund member benefits.
Test 3 – The “active member” test
Finally, the fund must satisfy the “active member” test by demonstrating that at the relevant time the fund satisfies the following:
- there is no “active member”; or
- at least 50% of the total market value of the fund’s assets attributable to superannuation interests held by active members is attributable to superannuation interests held by active members who are Australian residents; or
- at least 50% of the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members is attributable to superannuation interests held by active members who are Australian residents.
A member will be considered an “active member” if:
- the member is a contributor to the fund at that time; or
- the member is an individual on whose behalf contributions have been made.
A member will not be considered an “active member” if:
- contributions have been made to the fund on the members behalf;
- they are a foreign resident;
- they are not a contributor at that time; and
- the only contributions made to the fund on their behalf since they became a foreign resident were made in respect of a time when they were an Australian resident.
What can be done to protect a SMSF’s residency status?
Where a trustee of an SMSF is considering moving overseas or has moved already, it is important to ensure that professional advice is obtained about the impact of such a move on the SMSF and where possible to put in place measures (preferably prior to leaving Australia) to reduce the risk of later failing the residency test and losing access to the 15% concessional tax rate.
Depending on the circumstances, it may be possible to reduce (and in some instances, even remove) the risk the risk of falling foul of the residency test. These options include:
- appointing an enduring power of attorney;
- appointing an alternate director (where the SMSF has a corporate trustee);
- converting the SMSF to a Small APRA Fund;
- consider appointing additional trustees (so there is an equal number of resident and non-resident trustees); or
- roll over to APRA fund or wind up the SMSF; or
- where there is uncertainty about how the residency tests will be satisfied, obtaining a Private Ruling from the ATO.
Given the complexities and the potential serious consequences, we recommend seeking professional advice preferably prior to moving overseas to ensure that steps are taken to implement any strategies and that appropriate documentation is maintained to prove intentions as to temporary absences.
At HopgoodGanim Lawyers we offer a self-managed superannuation service, as well as having a full service Taxation team who can assist with advice on a range of SMSFs and taxation matters, including on SMSF residency. Contact Rebecca Edwards today for a discussion.