This was recently highlighted by the Australian Taxation Office through a case study, whereby the trustees and members of the fund worked outside Australia for two years and eight months. As a result, the SMSF failed to meet the residency rules and no longer met the definition of an Australian superannuation fund (under section 295-95(2) of the ITAA 1997).
What is important to understand
Section 42A of the SIS Act 1993 states that an SMSF is a complying fund for the year of income if it is a ‘resident regulated superannuation fund’ at all times during the income year.
A resident regulated fund is defined within section 10 of the SIS Act as an “Australian Superannuation Fund” within the meaning of section 295-95 of the ITAA 1997.
For an SMSF to remain an Australian Superannuation Fund and retain its complying fund status, the SMSF must pass the residency requirements. Subsection 295-95(2) of the ITAA 1997 provides that a superannuation fund is an ‘Australian Superannuation Fund’ at a time, and for the income year in which that time occurs, if:
1. the fund was established in Australia, or any asset of the fund is situated in Australia at that time (test 1);
2. at that time, the central management and control of the fund is ordinarily in Australia (test 2); and
3. at that time either the fund had no member covered by subsection (3) (an active member ) or (test 3) at least 50 per cent of
- the total market value of the fund’s assets attributable to superannuation interests held by active members; or
- the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;
is attributable to superannuation interests held by active members who are Australian residents.
Voluntary disclosure with the regulator
Whilst the case study highlighted the impact of the failure by the fund to meet the residency requirements, it more importantly outlined the benefits of voluntary disclosure by the trustees regarding their SMSF’s situation. Ordinarily in such circumstances, an SMSF would lose its complying status if it stopped being an Australian Superannuation Fund and would result in:
- its assessable income being taxed at a rate of 45 per cent (or 47 per cent for the 2014/2015, 2015/2016 and 2016/2017 income years); and
- losing almost half its assets in a one-off additional tax bill in the year that it became non-complying (2014/2015 – 47per cent tax rate).
However, in this case the regulator did not make the SMSF non-complying because of a number of mitigating factors:
- Bob and Betty voluntarily disclosed the breach to us before we took action;
- Bob was terminally ill; and
- Bob and Betty were divorced and their super benefits were subject to a Family Court order.
The ATO allowed the SMSF to retain its complying status and receive concessional tax treatment until it could be wound up (the trustees were required to roll over all the benefits and wind up the SMSF). Not all cases are going to be clear cut, but this case study highlighted the importance for trustees and professionals to be aware of the residency rules and apply them at all times. Failure to do so can result in a disastrous outcome.
Aaron Dunn is the managing director at The SMSF Academy