Care needs to be taken when self-managed super fund members decide to head overseas to work, even if it’s only for a short time. Tony Negline explains.
At any given time, a large number of Australians live and/or work overseas. Many of them are abroad for only a few years.
Most of them want to retire in their homeland.
If any of these people run, or are thinking of running, their own super fund, they need to be careful, as the fund might face excessive tax rates.
A super fund receives income tax concessions if it is a resident regulated super fund and a complying super fund.
A super fund is regulated if the fund’s trustees have irrevocably elected to be bound by the superannuation laws.
‘In reality, all a super fund needs to do is to keep open an Australian bank account’
If a super fund follows all those laws (or doesn’t get caught breaching them) then the fund is deemed to be a complying superannuation fund.
But what tests are used to determine if a super fund is a resident fund? One part of the test is found within the income tax laws. The other part, which ultimately determines whether a super fund loses its tax concessions, is found in the super laws.
Tax penalties for a non-resident super fund
In the first full financial year that a fund loses its residency status it will be taxed at 46.5 per cent. This tax rate will apply to the market value of the fund’s assets, less contributions not claimed as a tax deduction since June 1983.
The 46.5 per cent tax rate will then be applied to the assessable income of the fund for each full year that it continues to be a non-resident super fund.
If a fund returns to being a resident super fund then it will again face 46.5 per cent tax on the fund’s assets.
Yes that’s right – a potential total tax bill of at least 71 per cent on the assets of the fund.
The three key questions
So when will a super fund be deemed to be resident for income tax purposes?
There are three key questions that must be answered positively at some point during a financial year:
1. Was the fund established or is any asset of the fund based in Australia?
2. Is the central management and control of the fund based in Australia?
3. Does the fund have any resident active members?
If these tests are satisfied at a point in time during a financial year, a super fund will be an Australian Super Fund (“ASF”). This means that, technically, these rules could be satisfied for only one day during a financial year to ensure access to residency status.
Specific super laws say that a fund must satisfy the three “limbs” of the ASF definition at all times during a financial year before tax concessions are available. So a fund might be an ASF, but not at all times throughout a year, which means the penalty tax rates would apply.
Where the fund is established, and is an asset based in Australia?
The answers to both these questions can be factually determined.
In reality, all a super fund needs to do is to keep open an Australian bank account (or other similar type of financial product) with a nominal amount in the account in order to have an asset based in Australia.
Central control and management
Next the central management and control of a super fund must be based in Australia.
In Tax Ruling 2008/9 the Tax Office says that, at law, the trustee has the legal responsibility to exercise the central control and management; but this does not, of itself, mean the trustee is actually performing this role.
The ATO has expressed the view that determining where the central management and control resides involves a “focus on [the] who, when and where of the strategic and high level decision making and processes and activities of the fund”. This includes working out who formulates, reviews and updates a fund’s investment strategy. Where the day-to-day administrative functions are performed is irrelevant.
The law allows a trustee to be temporarily absent for up to two years but potentially still deemed to be in Australia. The ATO says that “the duration of the absence must either be defined in advance or related (both in intention and fact) to the fulfilment of a specific, passing purpose”.
Most Australians working overseas have no certainty about how long they will be away from this country. Hence it may be dangerous for Australians living overseas to assume that they will be able to satisfy this particular rule if their time away is for an indefinite period.
Active member test
The final issue that must be dealt with is the active member test.
A super fund member will be an active member if:
• the member is making contributions to the fund;
• contributions are being made for them;
• they aren’t a resident – this refers to residency under Australia’s income tax laws, which often has nothing to do with immigration or citizenship status (see the ATO website for further details);
• and they also fail a couple of other rules.
It can be a very complex question to determine if a super fund member is a contributor to the fund.
A fund will pass the active member test if:
• it has no active members;
• the market value of the assets of resident active members held in the fund is more than 50 per cent of all active member assets in the super fund;
• at least 50 per cent of monies payable to active members if they all left the fund is attributable to the super interests held by resident active members.
The ATO have confirmed in Tax Ruling 2008/9 that a rollover is a contribution even if it relates to the time when a member was an Australian resident. This means rollovers, and even transfers from other super funds, could impact a fund’s tax status. Be careful!
How to ensure that a super fund remains a resident super fund
In reality there are three potential solutions. It may be that for other reasons none of these solutions is suitable.
1. Registrable superannuation entity
First option is for the trustee to resign and for a new trustee, which holds a Registrable Superannuation Entity (RSE) licence, to be appointed in their place. When this happens the fund ceases to be a SMSF and becomes a Small APRA Fund. As the fund’s name suggests, the Australian Prudential Regulation Authority becomes responsible for supervising the fund and its trustee.
If the super fund members then return to Australia permanently and want to make the fund an SMSF again, then they could ask the RSE licensee to resign and appoint themselves as individual trustees or appoint a company that they are directors of as trustee.
2. Wind a fund up
An alternative solution to the problem of failing the residency test is to wind the fund up and transfer the assets to another super vehicle, such as a retail super fund.
3. Appoint an enduring power of attorney
The super laws allow a legal personal representative with an enduring power of attorney (EPoA) to act as trustee for a member (this doesn’t apply to a disqualified person such as a bankrupt).
In April 2010 the ATO released Self Managed Superannuation Fund Ruling 2010/1 which includes an example about satisfying the Australian Super Fund test using an EPoA.
We’ll leave how EPoAs are appointed to another time.
When an Australian is returning from overseas they sometimes want to bring back with them some overseas retirement money. In these cases the taxation that applies on the transfer of these benefits is very important and must also be considered.
Tony Negline is general manager, corporate strategy at SUPERCentral – www.supercentral.com.au. He is also the author of A How to Book of Self Managed Superannuation Funds. Details about the book are available at www.atcbiz.com.au/smsfstore.php
