Checking the Residency of your SMSF

Posted on May 18, 2015 by ATB Chartered Accountants

The following excerpts are derived from the ATO information providing on their website “Check the residency of your fund.”

To be a complying super fund and receive tax concessions, your SMSF needs to be a resident regulated super fund at all times during the income year. This means your fund needs to meet the definition of an ‘Australian superannuation fund’ for tax purposes.

An SMSF is an Australian superannuation fund if it meets all three of these conditions:

• your fund was established in Australia, or at least one of the fund’s assets is located in Australia
• the central management and control of your fund is ordinarily in Australia
• your fund either has no active members or it has active members who are Australian residents and who hold

at least 50% of:
– the total market value of your fund’s assets attributable to super interests, or
– the sum of the amounts that would be payable to active members if they decided to leave the fund.

If your fund stops being a complying fund because it does not satisfy the residency rules its assets (less certain contributions) and its income are taxed at the highest marginal tax rate (see Notice of Non-Compliance).

Here are some ways to avoid these consequences:

• If members are planning on going overseas, seek professional advice about maintaining the residency status of your SMSF.
• If your SMSF fails the residency test, rollover your funds to a resident regulated super fund and wind up the SMSF. Otherwise we have to make the fund non-complying.
• If a non-resident member of your SMSF wishes to make or receive contributions, they should consider making or receiving these outside of their SMSF, for example to a retail or industry super fund. They can then rollover the contributions to their SMSF when they return as an Australian resident for tax purposes

CASE STUDY: BREACHING SMSF RESIDENCY RULES

Bob and Betty were trustees and members of a self-managed superannuation fund (SMSF).

Bob worked outside of 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 Income Tax Assessment Act 1997). Because the SMSF is not an Australian superannuation fund, it cannot be a complying superannuation fund (under subsection 42A(1) of the Superannuation Industry (Supervision) Act 1992).

Bob and Betty voluntarily told us about their SMSF’s situation. We started an investigation as a result of their voluntary disclosure.

RESULT

Usually an SMSF would lose its complying status if it stopped being an Australian superannuation fund. As a result:

  • its assessable income would be taxed at a rate of 45% (or 47% for 2014-15, 2015-16 and 2016-17 income years)
  • it would lose almost half its assets in a one-off additional tax bill in the year that it became non-complying.

However, in this case we 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.
• Bob and Betty were divorced and their super benefits were subject to a Family Court order.

This allowed the SMSF to retain its complying status and receive concessional tax treatment until it could be wound up.

Bob and Betty were required to roll over all the benefits and wind up the SMSF.

This article is provided as general information only and does not consider your specific situation, objectives or needs. It does not represent accounting advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.