SMSF residency
SMSFs are generally not appropriate for people who spend extended time overseas. Such funds can easily lose their complying status and suffer significant tax penalties.
Residency requirements
A complying SMSF must be an ‘Australian superannuation fund’ under s.292-95(2) of the federal Income Tax Assessment Act 1997. Two key criteria that an Australian superannuation fund must satisfy are:
• its central management and control (CM&C) must ordinarily be in Australia; and
• broadly, 50 per cent of its account balances must be held for Australian resident active members (ie, the ‘active member’ test).
Requirement 1 — CM&C
The seminal cases on point define CM&C as being the location where the real business is carried on (De Beers Consolidated Mines Ltd v Howe [1906] AC 455, 458), and where the entity’s operations are controlled and directed (Koitaki Para Rubber Estates Limited v FCT (1941) 64 CLR 241, 248).
The ATO has broadly agreed with this interpretation, stating that CM&C is determined by looking at a fund’s strategic and high-level decision-making processes and activities, and not its day-to-day operations (TR 2008/9 [20]-[21]).
Requirement 2 — Active member test
Broadly, an ‘active member’ is a member in respect of whom contributions/rollovers are made. If no contributions/rollovers are made in respect of members during their overseas stay then this test is not invoked.
To avoid invoking the active member test, any contributions/rollovers that are required to be made whilst members are overseas can be made to a public offer fund and then rolled into the SMSF once the members return. The practical difficulty of stopping contributions, however, is the SMSF’s ability to manage its ongoing expenses and outgoings. Cash flow projections should therefore be undertaken before such a strategy is implemented.
Temporary absences
Section 295-95(4) expressly states that a fund’s CM&C will be considered ‘ordinarily in Australia’ even if it is temporarily outside Australia for a period of no more than two years. Therefore, there may be scope for SMSF members to be overseas temporarily without jeopardising the fund’s complying status. However, prior planning, even for those departing temporarily, is prudent to ensure the two-year rule is not overlooked.
Practical strategies to manage CM&C
The most common strategy for SMSF members heading off overseas is to ‘hand over’ control of their SMSF to one or more ‘trusted’ persons. This hand-over is initially documented via executing an enduring power of attorney (EPoA) in favour of each ‘trusted’ person. The member then resigns as an SMSF trustee (or director of the corporate trustee) and the nominated attorney is appointed as trustee (or director) in their place. The nominated attorneys must then undertake the SMSF’s strategic decisions.
Members should only appoint people they feel comfortable will act in their best interests as their attorneys.
One way to protect member interests is to have a specific EPoA drafted that only provides the attorney with the ability to act in matters relating to the specific SMSF. The EPoA can be further drafted such that the attorney is only given the power to make ‘member’ decisions after obtaining the member’s prior consent.
Tips and traps
Some common tips and traps associated with the residency requirements are:
• although an attorney is appointed, the attorney merely acts as a ‘puppet’ of the members;
• members make contributions without realising that they are doing so (eg, payment of an SMSF liability, transferring listed shares to an SMSF, etc); and
• advisers do not realise that the ATO does not have any discretion to determine that the SMSF is a complying superannuation fund, regardless of failing the residency rules.
Other considerations
Succession planning
The rules and procedures relating to estate, succession and tax laws in other countries may need to be examined when reviewing a client’s estate planning. This is especially the case where clients have acquired assets in overseas countries or have family members who have relocated overseas.
International property investments
SMSF trustees can invest in overseas property. However, compliance traps and practical considerations need to be first considered, as outlined below:
• the in-house assets rules can easily be unwittingly invoked if the SMSF does not acquire the real estate directly, but rather through a related company in the overseas country;
• inflated transaction costs may apply, including costs in sourcing and maintaining the property and costs for an overseas lawyer to complete the conveyance and provide advice on ownership restrictions, etc; and
• where limited recourse borrowing arrangements (LRBA) are undertaken, it is unlikely that overseas lenders, mortgage brokers and conveyancers will understand the nuances of the transaction, adding another layer of risk.
We recommend that expert advice be obtained both in Australia and the overseas jurisdiction before SMSF trustees buy overseas property, especially via an LRBA.
Conclusion
Advisers need to ensure that they consider the global implications when advising clients and that they are equipped to spot and appropriately handle any associated issues.
Daniel Butler is a director at DBA Lawyers.
