Super fund residency rules – it’s complicated!

Author: Brenda Hutchinson, Partner, TAG Financial Services

With the world becoming a smaller place, we are seeing more and more clients who travel overseas for extended periods of time for work purposes. For clients who have their own SMSF, there are many considerations that need to be taken into account when they are overseas for long periods of time. The most important of these is whether the fund will continue to meet the definition of an “Australian Superannuation Fund”.

Why is it so important to meet the Residency Tests?

In order to meet the definition of an “Australian Superannuation Fund”, a fund must meet three residency tests. If any of these tests are failed (even for 1 day), the fund will lose its concessional tax treatment and the tax rate will increase from 15% (or 0% if in receipt of a retirement-phase pension) to the highest marginal tax rate of 45%.

The fund will also be deemed to be a non-complying fund. Because of this, in the year the fund is made non-complying, an amount equal to the market value of the fund’s total assets (less non-concessional contributions) will be included in the fund’s assessable income. For every year that the fund remains non-complying, the assessable income is taxed at the highest marginal tax rate.

In addition to the taxation consequences, any salary sacrificed contributions made to a non-complying fund will be treated as employer contributions, and these contributions will be considered a fringe benefit. As a result, the employer will be subject to FBT on the sacrificed amount and will need to record the sacrificed amount on the employee’s payment summary as a reportable fringe benefit.

Overall, it is a very undesirable result for our clients.

What are the Residency Tests?

The three residency tests that must be satisfied are:

    1. The Established in Australia test
    2. The Central Management and Control test
    3. The Active Member test

As mentioned above, the residency tests must all be satisfied at all times and can be very difficult to rectify after issues have arisen. Furthermore, if the test has been failed, then it cannot be rectified retrospectively, as this could result in significant, adverse tax consequences for the fund.

Preparing for residency before you travel

If an overseas posting for work is on the cards, or your client is looking to have extended periods of travel, then working with the trustees proactively to get in front of any issues, would be a good idea.

Some proactive questions to ask your client, as they are in the preparation phase for an overseas stint, include:

    • Is the travel intended to be less than two years, or if it is going to be longer, is the definite return date planned?
    • Can the fund continue to meet the central management and control test whilst the trustees are overseas?
    • Do the superannuation balances of Australian resident active members equal 50% or more of all superannuation balances?

The answers to these questions will assist in determining the best alternative to avoiding a breach of the residency tests.

Proposed changes to the Residency Tests

In news that was well received, the Australian Government announced as part of the 2021-22 Federal Budget that it was planning to relax the residency requirements for SMSFs, by extending the central management and control test from two to five years, as well as removing the active member test.

It was anticipated that these measures would become effective from 1 July 2022, however, they have not yet received Royal Assent.

The changes to the residency tests would certainly be a welcome relief for trustees. However, until these changes are passed, it is imperative that trustees continue to abide with the current rules, to ensure they don’t lose half of their retirement savings!

Want to know more?

We will be taking a deep dive into this topic at the TAG Super Seminar

Any Questions?

If you have any questions, please contact us on 03 9886 0800 or via email.

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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2022. Please do not reproduce without the expressed written consent of the author.