Unlike members of retail super funds, there are some important considerations for self-managed super fund (SMSF) trustees living and working overseas.
There are currently three primary residency conditions that must all be satisfied to keep your SMSF compliant.
Rule 1. Establishment or Asset Location
To maintain compliance with residency rules, the SMSF must be established in Australia, or at least one of its assets must be located in Australia.
Rule 2. Central Management and Control (CMC)
The CMC rule states that high-level decision making and strategic management of the SMSF must happen on Australian shores. This includes:
- Setting and reviewing the fund’s investment strategy
- Making decisions on pension payments and contributions
- Managing the appointment of trustees and members
Therefore, someone may inadvertently breach the CMC condition if they:
- Stay overseas for an extended period of time: Under current conditions, trustees risk breaching CMC rules if they live overseas for more than two years. In 2021, changes were proposed to extend this period from two to five years, but they have not yet been legislated.
- Make critical decisions while abroad: If trustees based outside of Australia manage investments remotely from overseas, via video calls or emails, they risk breaching CMC conditions.
- Delegate power of attorney: Some trustees seek to get around CMC rules by delegating management to a local representative, but this may not be sufficient if key decisions are still made offshore.
Rule 3. Active Member Test
The active member test is satisfied if, at the relevant time, the SMSF has no active members or when at least 50% of the market value or Fund value is held by active members who are Australian residents.
An active SMSF member is defined as a contributor to the Fund – including rollovers - or has had contributions made to the SMSF on their behalf.
Someone may, therefore, breach the active member test by:
- Making contributions while overseas: If a trustee moves overseas and continues to contribute to the SMSF, they could breach this rule, unless members with Australian residency still holds at least 50% of the fund’s value.
- Changes in member balance: If the balance of a non-resident member grows beyond 50% of the Fund value, for example, due to investment gains this can result in non-compliance.
Do Residency Rules Affect Australians with Standard Superannuation Funds?
For Australians with retail or industry superannuation funds, residency rules imposed on SMSFs do not apply. That’s because large super funds are professionally managed and do not require individual members to meet residency conditions. However, non-residents should consider the following:
- Super contributions – Non-residents can generally continue to have superannuation contributions made on their behalf (e.g., from an Australian employer), but voluntary contributions may be restricted in some cases.
- Tax treatment – Superannuation withdrawals may be taxed differently for non-residents, depending on their country of residence and any tax treaties with Australia.
- Access to super – Residency status does not change standard superannuation preservation rules, meaning that funds remain locked until a condition of release (e.g., retirement) is met.
Recent Developments in SMSF Residency Rules
The Australian government proposed changes to relax SMSF residency requirements in the 2021/22 Federal Budget, including:
- Extension of the CMC safe harbour rule: Increasing the allowable period for overseas trustees from two to five years before breaching residency conditions.
- Abolition of the active member test: This would allow members to continue making contributions while overseas without impacting residency status.
As of July 2024, these changes have not yet been legislated, but there are indications they may soon be enacted.
Residency Rules – The Implications for SMSF Trustees
Until any legislative changes are, indeed, enacted, SMSF trustees should:
- Monitor your travel: If planning an extended overseas stay, get professional financial advice to ensure you don’t breach the CMC condition. Currently, the threshold is two years, but trustees should be prepared for potential changes.
- Assess contribution activities: Ensure that contributions made while overseas do not violate the active member test.
- If a member of your Fund becomes a non-resident, but wishes to continue to receive contributions, the ATO also advises that you may join a retail fund to do so, and roll over the contributions to the SMSF once back in Australia as an Australian resident.
- If your Fund can’t satisfy the residency test, the ATO recommends you roll funds over from your SMSF to a retail super Fund and wind up the SMSF.
- Stay informed: Keep up to date with legislative developments to ensure compliance.
Meanwhile, the onus is on tax agents, SMSF accountants and advisers to update the ATO if residency conditions aren’t met, rather than wait for the ATO to notify on non-compliance.
For support with your SMSF, complete the form below or contact us now: smsf@primefinancial.com.au
