Navigating the rules regarding SMSFs and small APRA funds for expats ending their Australian tax residency can be a complex area, and can result in severe tax consequences if you get it wrong for your clients.
Given the increasingly connected global community, it’s common for clients to work overseas. Where an individual ceases to reside in Australia, there is the possibility their tax residency status may change.
Retaining Australian tax residency
Where an individual’s Australian tax residency is retained following departure to their new host country, little may change in relation to their superannuation strategy.
In particular, where they have a superannuation interest held within an SMSF or small APRA fund (SAF), ongoing contributions can generally be continued. Of course, depending on their host country, obtaining a local opinion that there are no adverse consequences of such a strategy is always advisable.
Ceasing Australian tax residency
Where an individual ceases Australian tax residency and they have a superannuation interest held within an SMSF or SAF, attention is needed to ensure the definition of ‘Australian superannuation fund’ is met at all times. Where a fund does not meet this definition at any relevant time, it will become non-complying.
As a non-complying fund, any concessional contributions received and any assessable investment income derived during the year will be taxed at 47 per cent. The fund will also be taxed at 47 per cent on the market value of the assets of the fund (less amounts attributable to non-concessional contributions) at the beginning of the year in which the fund became non-complying.
To satisfy the definition of ‘Australian superannuation fund’ at any particular time, the fund must satisfy three tests:
- The fund was established in Australia, or any asset of the fund is situated in Australia at that time
- The central management and control (CM&C) of the fund is ordinarily in Australia
- The ‘active member’ test.
All three tests must be met at any given time for a fund to be considered an ‘Australian superannuation fund’.
Test 1: The fund was established in Australia, or any asset of the fund is situated in Australia at that time
To meet this test, the initial contribution must be paid to and accepted by the trustees of the fund in Australia. If that didn’t occur, the fund can still satisfy this test if at least one asset of the fund is situated in Australia, e.g. real property in Australia or shares in an Australian company.
Test 2: CM&C of the fund is ordinarily in Australia
This test examines where the strategic and high-level decisions of the trustees have been made. These duties may include:
- Formulating the investment strategy
- Reviewing or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund's investments
- Determining how the assets of the fund are to be used to fund member benefits.
Although the legal responsibility for exercising the CM&C of a fund rests with the trustees, Tax Ruling TR 2008/9 acknowledges that the existence of this legal responsibility does not necessarily mean trustees actually have the CM&C. This is because it is the actual performance of those duties that determines who is exercising the CM&C of the fund.
Test 3: The ‘active member’ test
The ‘active member’ test is satisfied if, at the relevant time:
- The fund has no ‘active member’ or
- At least 50 per cent of the total market value of the fund’s assets attributable to superannuation interests held by active members is attributable to superannuation interests held by active members who are Australian residents or
- At least 50 per cent of 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.
What is an ‘active member’?
An ‘active member’ includes:
- A member who contributes
- A member who has a contribution made on their behalf (including rollovers).
However, a member of a fund is not an active member of the fund if:
- They are a foreign resident
- They are not a contributor at that time
- The only contributions made to the fund on their behalf since they became a foreign resident were made in respect of a time when they were an ‘Australian resident’.
Contributions for the purposes of this test include:
- Direct cash payments made by an employer or an individual to the fund
- A transfer of property, or other asset, to the fund ‘in-specie’ by an employer or individual rollovers
- Spouse contributions
- Government co-contributions
- A superannuation lump sum that is paid from a foreign superannuation fund or an amount transferred to the superannuation fund from a foreign superannuation scheme.
Catherine Chivers, manager – strategic advice, Perpetual Private
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