In a submission to the government’s consultation paper on modernising individual tax residency, the SMSFA stated the active member test does not provide any additional integrity to the superannuation system.
“The establishment and central control and management tests already ensure that only Australian-based superannuation funds can benefit from the superannuation tax concessions,” the submission stated.
“Instead, the active member test is an unnecessary source of red tape, especially for SMSFs and small APRA funds, adding unnecessary costs and reducing the efficiency of the superannuation system.”
In the May 2021 budget, alongside the modernising of individual tax residency rules, the former government announced changes to two components of the tax residency rules for SMSFs: the removal of the active member test and the extension of the temporary absence rule for non-residents from two to five years.
The SMSFA said these reforms are important for the SMSF sector, and urged the government to undertake the necessary industry consultation and progress the required legislation as a matter of priority.
“They require only simple, legislative amendments,” the submission said.
The submission continued that the definition of “Australian Superannuation Fund” in section 295-95 of the ITAA 1997 creates administrative difficulties and red tape for members of SMSFs.
“This issue also equally applies to small APRA funds. It involves situations where Australians who are temporary residents overseas are being prevented from making contributions to their SMSF due to the penalties involved and the fund potentially being taxed as a non-complying superannuation fund.
“The only alternative is for the individual to make contributions to a large APRA-regulated superannuation fund and upon their return to Australia rollover those contributions back to their SMSF.”
As a result of this, there are significant additional costs arising from the holding of multiple superannuation fund accounts, and the need to consolidate accounts by rollover upon return to Australia.
The SMSFA said this increases fund administration and compliance costs for the individual affected, reducing their overall superannuation balance.
“It also exposes superannuation balances to market risk when later seeking to consolidate the duplicated account into their primary account.
“The duplication of superannuation accounts does not align with the current superannuation policy settings. The fact that the residency rules unfairly affect superannuation members who ‘choose’ to save for retirement in an SMSF but do not affect those who save in a large APRA-regulated superannuation is inequitable.”
If a fund fails to meet the definition of an Australian superannuation fund it is treated as a non-complying fund and is subsequently taxed at 45 per cent on it is taxable income for the financial year. It will also taxed at 45 per cent on the value of the fund’s investments at the commencement of the financial year in which it becomes non-complying, less the amount of broadly any non-deductible contributions (non-concessional contributions).
The association’s submission said the active member test should be removed from the requirement for any superannuation fund to qualify for taxation concessions under the income tax law.
It stated residency of the fund should be determined on the same principles as all other entities for income tax purposes, that is, the place of establishment and the location of the management and control of the entity.
“Removing the active member test would ensure that SMSF members who are working overseas can still contribute to their fund irrespective of whether their fund balance exceeds 50 per cent of the fund’s assets,” it stated.
“This would mean if the fund was established in Australia and the central control and management ordinarily remains in Australia, then an SMSF member can continue to contribute to a fund of their choice.”
It also said the existing two-year exemption is too short in the context of modern work arrangements and called for an extension of the temporary absence exception from two to five years
“Extending the central control and management exception will reduce red tape and compliance issues for Australians working overseas while not compromising the integrity of the superannuation or taxation systems.
“These proposed amendments will benefit SMSF members who spend time overseas working and still wish to make contributions to their fund to save for their retirement.
“We do not believe there will be any negatively affected superannuation fund members from the proposed amendments.
“We believe these proposed changes would have a negligible impact on revenue as the changes would simply cause concessionally taxed contributions to be redirected to an SMSF instead of a large APRA-regulated fund.
“It would also support the Government’s policy to ensure that all superannuation fund members are able to exercise choice of where their contributions are made.”
