If you have a SMSF then it is imperative to seek advice before you leave as the penalties for non-compliance can be severe.
In Australia, there are close to 600,000 SMSFs. The growth over the past ten years has been quite exceptional. They can be a great vehicle for those that wish to manage their own super investments, or invest in assets that typical super funds do not access, or to use borrowed funds to supercharge their investments.
However, for some the benefits of owning a SMSF can turn into a nightmare should the Australian Tax Office (ATO) deem that the fund has become a ‘non-complying Australian superannuation fund’.
How does a SMSF retain its tax-concession status?
For a SMSF to continue to enjoy the superannuation tax concessions it must remain a ‘complying Australian superannuation fund’. To remain a complying SMSF your fund must pass three tests:
The SMSF established or at least one of its assets are held in Australia
This test is usually easy – almost all SMSFs were set up in Australia. This test is also passed if the initial contribution to the fund was made in Australia.
Central management and control is in Australia
The central management and control is hugely misunderstood – very basically it’s where the high-level decision making occurs.
The misunderstood part is that the regulations state that you can ‘temporarily’ depart Australia and still pass this rule for up to 2 years. However, if you intend to permanently depart (such as retiring overseas) then this 2-year window may not exist. Many fall into this trap.
You can generally overcome this trap and receive the 2-year exemption by stating that you are retiring overseas temporarily at first, to decide whether a more permanent move is suitable later.
A further strategy to overcome this rule after the 2-year exemption runs out, or you are deemed to move overseas permanently from day one, is to appoint a legal representative as SMSF trustee. The legal representative will be empowered to make those decisions the ATO deems to be key management decisions of the fund, such as:
- Reviewing investments and fund performance
- Determining how assets are to be used for member benefits
- Formulating the investment strategy of the fund
Non-residents cannot own more than 50% of active assets
If a member of the fund contributes to the SMSF (including a rollover from another fund), then that member’s assets are deemed to be ‘active assets’.
Active assets of non-resident members of the fund cannot be greater than 50% of the entire SMSF assets.
Members of the fund that do not contribute to the SMSF do not have their assets of the fund counted as active assets.
The following is an example with a three-member SMSF:
|Member||Member Balance||Contribute to SMSF||Aust. Resident|
Under this scenario, the SMSF will be a ‘non-complying SMSF’. Roy is a non-Australian resident and he contributed to the SMSF. As Roy’s member balance of the fund is $200,000, which is greater than 50% of the $350,000 SMSF balance, this test has subsequently failed.
As Roy is the only member contributing to the fund only his member balance of $200,000 is considered an active asset.
If Bob and Bev were non-Australian residents, but Roy was as Australian resident, then it would not matter who contributed to the SMSF as Roy’s balance of $200,000 is over 50% of the fund’s total assets.
Penalties for non-complying non-resident SMSFs
If the ATO deems that your SMSF is a non-complying fund, you will lose all the tax concessions that are available for super funds in general. Not only in the current year, but also since inception of the SMSF.
The penalty currently stands at 45% of the SMSF income AND the SMSF’s ‘concessional component’ in the year that the SMSF became non-compliant.
For most funds the concessional component will make up a great majority, if not all their super balance. The concessional component that will incur the 45% penalty includes:
- Employer contributions
- Salary sacrifice contributions
- Any personal or self-employed contributions that you have claimed a personal tax deduction on
Ever made to the fund! It also includes the investment returns on those contributions since day one!
A simple example:
|SMSF fund component||SMSF balance||Tax payable non-compliance|
You can quite easily lose a substantial amount of your SMSF balance if your fund becomes non-compliant if you relocate overseas, so it is important to know the rules and plan accordingly before you go.