Despite most SMSF trustees complying with the residency rules, there are some persistent misunderstandings leading to severe tax consequences, according to one consultant.
Speaking to SMSF Adviser, education and training consultant and former Cavendish Superannuation head of education and market research, Tim Miller, pointed to issues that continue to arise when SMSF trustees do not appropriately consider the residency rules when making contributions to their fund.
For example, he said by making a contribution to a super fund when the members are non-residents and there’s no non-concessional component, theoretically the trustee could “potentially lose close to half of the fund”.
“They may be working overseas and they might be a resident overseas for tax purposes, and not get the appropriate advice or determine what the appropriate position is,” Mr Miller said.
He said the trustee may also be under the impression it’s a situation where the mistake can be fixed later.
“[However] a strict determination of the rules will determine that once that contribution has gone into the fund and has been accepted by the trustees, then you’re going to be accessed from an active member position – and that could create a compliance problem if there are no resident active members in the fund.
“It’s one of those areas where you have to be aware of the rules and the contribution rules around non-residency prior to making the contribution, because it’s not like the excess contribution regime where you make a mistake and withdraw the excess and pay the penalty.”
Mr Miller explained that once the contribution has been made there is no actual excess contribution and that it’s “purely a taxation definition” – “you’ve got a compliance issue right away”.
The consequence of this is that the income of the fund and the assets in the fund are taxed at the top marginal tax rate of 45 per cent and by the Budget Repair Levy, with only non-concessional elements excluded from the tax calculations.
“So it’s a double hit in that it’s not only the income for the current year, but also the assets in the fund at end of the previous financial year,” he said.
“It’s a trap for anyone that’s going to be overseas for any extended period of time.”
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