What is a Self-Managed Superannuation Fund?
In order for a Self-Managed Superannuation Fund (SMSF) to be a complying superannuation fund and receive the concessional 15% tax rate, it needs to be a resident regulated superannuation fund at all times during the income year and meet the definition of an “Australian Superannuation Fund” under s.295 – 95 (2) of the Income Tax Assessment Act, 1997.
Changes to the residency of members and Trustees can render an SMSF non-compliant and subject to penalty taxes.
Does my fund meet the definition of an Australian Superannuation Fund?
There are three conditions that an SMSF must satisfy to meet the definition of an ‘Australian Superannuation Fund‘:
1. The SMSF must be established or situated in Australia. An SMSF is established in Australia if the initial contribution made to establish the SMSF was paid in Australia if at least one asset of the SMSF is situated in Australia;
2. The central management and control of the SMSF must ordinarily be in Australia. The individual in the SMSF who makes high-level decisions such as formulating, reviewing, updating the investment strategy, and determining how the assets in the SMSF are to be used to provide Member benefits, is said to have the central management and control of the SMSF. If this person is in Australia, then the SMSF satisfies this test. However, if this person is not in Australia, then the SMSF will still meet the tests as long as this person is temporarily outside Australia for a period of not more than 2 years. If this person is outside Australia for a period of greater than 2 years, then the SMSF will still satisfy this test if it can prove that although this person is outside Australia for more than 2 years, their period of absence is temporary;
3. The SMSF has no foreign active members. An active member is a member who contributes into the SMSF or on whose behalf contributions have been received. The Trustees of an SMSF need to ensure that any contributions received in the SMSF are contributions made for the members during the period they are or were in Australia. If contributions are received for or from a foreign active member (ie. while members are overseas), then the Trustees need to ensure that at least 50% of the total assets in the SMSF belong to resident members.
How is ‘central management and control’ determined?
Whether or not the central management and control of the SMSF is ordinarily in Australia is determined by examining whether, in the ordinary course of events, the central management and control of the SMSF will be “temporarily” outside Australia if the person or persons who exercise the central management and control of the SMSF are outside Australia for a relatively short period of time and during that time, they exercised the central management and control of the SMSF overseas.
The duration of the actions must either be defined in advance or related to the fulfilment of specific passing purpose. The test must be applied at the relevant time during the year. The test is a “real time” test and is not applied retrospectively or for the benefit of hindsight.
Because the law stipulates a two year period of absence, one must not interpret this by thinking that as long as they are overseas for a period of no more than 2 years, their SMSF will remain a resident fund. However, it is not just the time period of 2 years that is considered. It is also the intention of the Trustee and the purpose of going overseas.
Due to the requirements of the SMSF to maintain its compliance status and meet the definition of an Australian Superannuation Fund, if you are planning to travel overseas, you need to consider putting in place an Enduring Power of Attorney. This appoints someone to act as a resident Trustee of your SMSF and maintains your fund’s compliance.
For more information on SMSF’s, or speak to our estate planning department today.