There are 3 tests that a Self-Managed Superannuation Fund (“SMSF”) must meet in order to be treated as an “Australian Superannuation Fund” under the Income Tax Law, which are:
- The SMSF is established in Australia and any asset of the SMSF is situated in Australia;
- The Central Management and Control of the SMSF is ordinarily in Australia;
- The SMSF must satisfy the Active Member Test.
It is not enough that the SMSF is established and structured correctly under either a corporate trustee structure or individual trustee’s structure. In order for an SMSF to be treated as a regulated compliance superannuation fund, it needs to be an Australian resident fund too.
What is an Active Member?
A Member of an SMSF is considered to be an ‘Active Member’ if they contribute to their SMSF or if contributions are made to their SMSF on their behalf, for example, by their employer. If an SMSF Member is no longer an Australian resident for income tax purposes, then they will also become a Non-Resident Member. Under the Active Member Test, if an SMSF has any Non-Resident Members, and the Non-Resident Members make contributions to their SMSF, then the aggregate of their superannuation balances must not be more than 50% of the aggregate of the balances of all resident Active Members of the SMSF.
For the purposes of the Residency Test, the concept of ‘Contribution’ is very broad and includes:
- Cash contributions made by employers or Members of the SMSF;
- Transfer of assets as in-specie contributions;
- Spouse contributions;
- Government superannuation co-contributions;
- A rollover superannuation benefit received by the SMSF;
- A director termination payment;
- A lump sum superannuation payment paid from a foreign superannuation fund;
- Superannuation guarantee shortfall amounts;
- Transfers from the Superannuation Holdings Special Account.
If contributions are received for a Member of an SMSF while the Member is a non-resident, and the contributions, when added to the balance of the Non-Resident Member, amounts to more than 50% of the total balances of the Active Members, then the SMSF will fail the Residency Test.
If Members who hold at least 50% of entitlements remain in Australia while other Members go overseas, it will be necessary for each Resident Member to be classified as ‘Active’ Members by having contributions made for them into their SMSF, if the Overseas Members also make contributions. This becomes difficult when the majority of SMSF’s are 2-Member funds comprised of a married couple, given that they generally travel together.
If the superannuation balances of Resident Active Members are less than 50% of the total balance of all Active Members or Resident Members with at least 50% of the total balance fail to make a contribution while a Non-Resident Member does, the Active Member Tests will not be satisfied and the SMSF will fail the residency status.
What if the SMSF becomes a Non-Resident Superannuation Fund?
If the SMSF becomes a Non-Resident Superannuation Fund, it is a non-complying SMSF and its earnings plus assets less any personal non-deductible contributions will be taxed at 47% in the first year of non-residency. Then each year thereafter, its earnings will continue to be taxed at 47%. Thus, for example, if a husband and wife are Members of their SMSF, with the husband’s superannuation balance being more than the wife’s superannuation balance, with the wife moving to London for work and becoming a non-resident for income tax purposes, if the wife makes a contribution to their SMSF while she is overseas and the husband does not make any contributions to their SMSF in that financial year, resulting in him not being an Active Member, their SMSF will fail the Residency Test.
Another example is where a person is a single Member of a SMSF goes overseas on a holiday for an indefinite period of time in July, for example, 2014, resulting in that person ceasing to be an Australian resident under the Income Tax Law. If after departing for overseas, her employer makes a superannuation contribution to her SMSF during her absence in 2014, and that person makes no personal contributions to his or her SMSF, resulting in that person becoming an Active Member and the SMSF will lose its residency status and become a non-complying SMSF.
For further information or advice concerning Superannuation, contact the experienced team at Rockliffs Lawyers today.