SMSF Technical Education & Strategies

 

Maintaining your SMSF when going overseas for an extended period

by Bryce Figot

DBA Lawyers.

Broadly, in order for an SMSF to be a complying superannuation fund and thus receive tax
concessions, it must be — among other things — an Australian superannuation fund as defined under the ITAA 1997.

Section 295-95(2) provides three tests, all of which must be passed, in order for a fund to be an Australian superannuation fund.

 

They can be broadly summarised as:

 the fund was established in Australia, or any asset of the fund is situated in Australia at that time
 the central management and control of the fund is ordinarily in Australia
 the active member test is met.

The Commissioner sets out his views relating to this in Tax Ruling 2008/9.10

SMSF trustees often forget about meeting these tests. Whenever a trustee is moving overseas, alarm bells should ring, and specific steps must be taken. Failure to take the specific steps can result in a hefty and unnecessary tax bill as well as little avenue for successful appeal.

 

 

Specific steps

There are three key steps to ensure that a self managed superannuation fund with overseas members meets the residency rules.

First step

Either the fund must have been established in Australia, or any asset of the fund must be situated in Australia. This step is invariably met.

Second step

The central management and control of the fund must ordinarily remain in Australia. The Commissioner believes that this means the strategic and high level decision making processes and activities of the fund must ordinarily remain in Australia. He believes that the strategic and high level decision making processes includes:

 formulating the investment strategy for the fund
 reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments.
 if the fund has reserves - the formulation of a strategy for their prudential management and
 determining how the assets of the fund are to be used to fund member benefits.

The Commissioner further believes that formalistic or administrative activities do NOT constitute central management and control. Examples of formalistic or administrative activities include the actual investment of the fund's assets pursuant to a pre-existing investment strategy.

Accordingly, one way to try to meet this rule is to ensure that the fund’s trustees ordinarily only make the strategic and high level decision while in Australia. However, this is not the preferred course of action for a number of reasons. One reason is that factually proving where the trustees ordinarily make the strategic and high level decision is easier said than done.

 

The preferred way to meet this rule is to transfer trusteeship (or directorship if a company is the trustee) to a trusted Australian family member or friend. This should happen before the client leaves Australia. The trusted Australian family member or friend should then centrally manage and control the fund. On its face this poses a problem: the fund no longer appears to a self managed superannuation fund as the members are no longer the trustees (or directors of the corporate trustee).

 

However, provided that the trusted Australian family member or friend holds an enduring power of attorney in respect of the members, the fund will still be a self managed superannuation fund. The Commissioner has set out his views on the uses of enduring powers of attorney in Self Managed Superannuation Fund Ruling SMSFR 2010/2.

Third and final step

Finally, no contributions or roll-overs whatsoever should be made to the self managed superannuation fund while its members are overseas. This is a slight over simplification of the actual rule, but if clients follow this simplified version, they will never go wrong.

If superannuation contributions must be made while clients are overseas, they should be made to a large commercial super fund. Then once the clients have resumed being Australian residents again, they can roll benefits from the large fund to the self managed superannuation fund.

 

What if the SMSF trustee has already gone overseas?

These three rules work well where the trustee or their adviser has the opportunity to plan in advance. However, often work constraints mean trustees must leave the country quickly and with little time to properly consult with their adviser. Accordingly, an adviser might find him or herself in the tricky position of having an overseas client who has a self managed superannuation fund where the three rules might not have been followed. Advisers should act quickly in this situation and consult an expert for tailored advice to determine whether the fund still meets the residency rules and whether any other avenues exist.

 

 

Example of a bad outcome

CBNP Superannuation Fund and Commissioner of Taxation [2009] AATA 709*

There was a self managed superannuation fund with only one member, Ms M. Ms M was also the only director of the fund’s corporate trustee. Ms M ceased to be a resident of Australia for income tax purposes, moving to New Zealand. Ms M installed her brother, Mr M, as a fellow director of the fund’s corporate trustee. Nevertheless, all decisions in relation to the management and control of the fund from then onwards were made by Ms M in New Zealand.

Ms M personally borrowed about $118,000 from fund assets. This loan could give rise to many different contraventions, including:

• a contravention of the limit on investments in in-house assets
• a contravention of the prohibition on loans to fund members
• a contravention that the fund only be maintained for certain core and ancillary purposes (ie, the sole purpose test).

 

The fund’s auditor focused on the first contravention and reported it to the Commissioner of Taxation. The Commissioner then audited the fund. Upon auditing the fund, the Commissioner realised that the fund failed the residency rules. The Commissioner issued a notice of non-compliance. The fund’s total assets were approximately $273,768. The notice of non-compliance resulted in a tax bill for the fund of approximately $146,000.

The fund appealed the notice of non-compliance to the Administrative Appeals Tribunal. The Tribunal found that it was ‘most unfortunate that Ms M will suffer a significant reduction in her self-managed superannuation fund benefits. The Tribunal sympathises with her and the position in which she finds herself, but has no greater power than the respondent under the SIS Act to assist her.’ Accordingly, the tax liability stood.

 

Bryce Figot is a Senior Associate at leading SMSF law firm DBA Lawyers (www.dbalawyers.com.au). Bryce can be contacted respectively at bfigot@dbalawyers.com.au. This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold quarterly SMSF seminars at venues all around Australia. For more details or to register, visit www.dbanetwork.com.au or call Marie on 03 9092 9400.

 

This article contains general information only and is no substitute for expert advice. Further, Bryce Figot & DBA Lawyers is not licensed under the Corporations Act 2001 (Cth) to give financial product advice. We therefore disclaim all liability howsoever arising from reliance onany information herein unless you are a client of DBA that has specifically requested our advice.