Overseas travel and your SMSF’s residency status
With the festive season fast approaching, many will have plans to have time away, including travel overseas.
With the number of overseas trips returning to pre-pandemic levels, it’s worthwhile considering the residency rules that apply to an SMSF. Whilst most overseas trips would not generally have any consequences for an SMSF, where it does, they can be irreversible and severe.
For an SMSF to be a complying superannuation fund and enjoy the associated tax concessions, it must satisfy the requirement of being an ‘Australian superannuation fund’, as outlined in the Tax Act.
Three tests must be satisfied, at all times, to be treated as an ‘Australian superannuation fund’:
- The fund was established in Australia, or any asset of the fund is situated in Australia.
- The Central Management and Control () is ‘ordinarily in Australia’.
- The active member test.
The first test is a once and for all test and generally, can be easily satisfied. It’s the second and third tests that can create issues for an SMSF, which can lead to failing the residency test.
CM&C test
For the CM&C of the SMSF to be considered ‘ordinarily in Australia’, despite the trustees being outside Australia, their absence must be ‘temporary’. This must be determined objectively and in advance or relate (both in intention and fact) to the fulfilment of a specific, passing purpose. Importantly, a ’temporary’ absence cannot be established retrospectively.
Example 1
Henry and Heather are members of their SMSF and are planning to take a three-week overseas cruise. They only plan to be outside of Australia for three weeks. During their time away they expect to have to make some decisions relating to their SMSF.
Whilst they may make decisions about their SMSF when outside of Australia, their absence would be considered temporary as it was determined in advance and was for the fulfilment of a specific purpose. It would be considered that the CM&C of their SMSF was ‘ordinarily in Australia’.
Example 2
Fabian and Freda, members of their SMSF, travel to an overseas country for an extended working holiday. They do not have an expected return date although they do intend to return to Australia at some point in the future. They exercise the CM&C of the fund whilst overseas.
They had been renting a home in Australia for several years and on leaving Australia, did not renew it. They sell their cars and larger items of furniture and give some smaller items they do not wish to take with them to Freda’s parents. Apart from personal bank accounts and their interests in the SMSF, they do not have any assets in Australia. Whilst overseas, they live in rented accommodation.
The CM&C test is a real-time test and should be applied at the time Fabian and Freda move overseas. Given these factors, there is a risk that their absence from Australia would not be considered a temporary absence. Further, the intention of the trustees to find work whilst they are overseas is not of itself sufficient to establish a specific, passing purpose such that the absence is considered temporary.
As Fabian and Freda exercise the CM&C of the fund whilst overseas, and the fact that their absence is not temporary, the circumstances are likely to lead to the conclusion that the CM&C of the fund is not ‘ordinarily’ in Australia and consequently the SMSF has failed the residency test.
Active member test
Where an SMSF has no ‘active members’, this test is automatically satisfied. That is, it’s only an issue where an SMSF has at least one ‘active member’ in an income year. Consequently, it’s important to understand when a member will be an ‘active member’ and if so, whether or not they are an Australian resident for income tax purposes. The test for whether an individual is a resident for tax purposes is not the same test that is applied to determine if an SMSF is an Australian superannuation fund.
The circumstances of each scenario need to be considered and analysed in the context of these three tests before the member(s) leaves Australia. Where it is envisaged that there is a risk to the SMSF satisfying these tests, there are actions that can be taken to safeguard against failing them. However, such actions can only be enacted prospectively, they cannot be retrospectively applied. Once the SMSF has failed any one of the three tests, it cannot be rectified – there are no do-overs.
Failing to be an ‘Australian superannuation fund’
Where a complying SMSF fails to meet the requirements to be an ‘Australian superannuation fund’, it becomes a ‘non-complying superannuation fund’. This results in the fund’s tax status changing accordingly and consequently, it will lose access to the tax concessions that a complying superannuation fund enjoys. Further, in the income year the SMSF is made non-complying, there is a sting in the tail with it being included as assessable income and taxed at the non-complying fund tax rate of 45 per cent. The statutory amount is based on the total of all SMSF member balances at the start of the relevant income year, less the tax-free component.
