The ATO has put out an information paper entitled “Check the residency of your fund” with a descriptive case study.
The following are excerpts:
To be a complying super fund and receive tax concession, an SMSF needs to be a resident regulated super fund at all times during the income year.
This means a 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:
1, the fund was established in Australia, or at least one of the fund’s assets is located in Australia;
2, the central management and control of the fund is ordinarily in Australia; and
3, the 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 the interests; or
• the sum of the amounts that would be payable to active members if they decided to leave the fund.
if a super 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.
Here are some ways to avoid these consequences:
If members of a super fund are planning on going overseas, they should seek professional advice about maintaining the residency status of their SMSF.
If an SMSF fails the residency test, it should rollover its funds to a resident regulated super fund and wind up the SMSF. Otherwise the ATO will make the fund non-complying.
If a non-resident member of an SMSF wishes to make contributions, they should consider making 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 an 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 S.295-95(2) of the ITAA 1997).
Because the SMSF is not an Australian superannuation fund, it cannot be a complying superannuation fund. Bob and Betty voluntarily told the ATO abut their SMSF situation. As a result of their voluntary disclosure, the ATO started an investigation.
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% and 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 the ATO says that it did not make the SMSF non-complying because of a number of mitigating factors:
• Bob and Betty voluntarily disclosed the beach to the ATO before it 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 would up.
Bob and Betty were required to roll over all their benefits and wind up the SMSF.