Quirks with residency rules pinpointed for SMSFs

“The central management and control test relates to where the high-level strategic decisions for the fund are being made and where those people are located at that particular time,” Mr Ketsakidis reminded delegates at the SMSF Summit in Sydney last week.

Mr Ketsakidis said that there is a safe harbour in the legislation about being overseas for two years on a temporary basis.

While this allows an SMSF trustee to overseas for two years, if someone had intended to move overseas permanently but only stayed for 18 months, they would not qualify for the safe harbour, the partner warned.

“It’s about permanence, so the fact that there happens to be a two-year safe harbour for you is irrelevant if your intention was to move permanently overseas,” the partner explained.

“One of the examples in the tax ruling is that if you chose to go overseas and then for some reason someone becomes ill or there’s some reason for you to come back to Australia within the first two years — well, that’s not enough to satisfy the test.”

However, the flip side is also true, Mr Ketsakidis said. So, if a client was, for example, seconded to work in the UK and it’s only meant to be for two years so they don’t sell your home, they keep your Australian health insurance but the project then gets extended for another 12 months, they would still satisfy the test.

“Even though it’s beyond the two years, the intention is to be there temporarily, and the fact that the circumstances are outside of your control, and that everything else points to you intending to return home, means you can still satisfy the test,” the partner said.

The concept of whether living abroad is temporary or permanent and the intention behind that is therefore very important, the partner said.

“If you were going on a working holiday but you don’t have any ties to Australia, you used to rent here, you decided to sell your assets and your furniture and whatever else — well, the ATO would argue that you intended to break the nexus with Australia. So, you have intended to make all your strategic decisions while overseas,” the partner said.

Mr Ketsakidis said that they can also be permanently overseas, but the high-level strategic decisions such as rebalancing the portfolio and dealing with reserves are made in Australia.

“The client might come home around Christmas every year and during that one- or two-week period, they catch up with all their advisers and make decisions about the next year,” the partner said.

“This would still qualify as central management and control continuing to be in Australia.”

It may also be possible, according to Mr Ketsakidis, for the SMSF client to delegate authority to make investment decisions, such as rebalancing the portfolio, to someone living in Australia.

“We’re talking about delegation as opposed to someone being your power of attorney or personal legal representative, and it must be allowed in your deed or constitution, but it does allow you to satisfy that test,” Mr Ketsakidis said.

“So, there are a number of ways that people can be overseas for quite some time and still satisfy the residency requirements for their super fund. So, it’s a lot more flexible than what people might otherwise think.”