Self-managed Super Funds (SMSFs) and Residency Rules

Technical Articles

Did you know that your residency could cause your SMSF to be non-complying and put almost half your retirement funds at risk?

In a case study recently released by the Australian Taxation Office (ATO), an SMSF narrowly avoided being made non-compliant. A few specific mitigating factors contributed to this outcome: voluntary disclosure of the breach of residency rules, terminal illness, and the super benefits being subjected to a Family Court order as a result of divorce.

How about SMSFs that are not in these exact circumstances?

In order to qualify for tax concessions, an SMSF needs to be a complying superannuation fund, which means that it must be a resident regulated superannuation fund at all times during the income year. Essentially, this means that the definition of an ‘Australian superannuation fund’ must be met.

For an SMSF to be an Australian superannuation fund, the following conditions must be met:

·         The fund was established in Australia or any asset of the fund is located in Australia

·         The central management and control of the fund is ordinarily in Australia

·         The fund either has no active members or its active members who are Australian residents must hold at least 50 percent of the total market value of the fund’s assets attributable to  super interests or the total amounts payable to active members if they leave the fund.

What happens if your SMSF is non-complying?

In the financial year that the fund becomes non-compliant, the fund’s assessable income will include its ordinary income and statutory income from previous years. Therefore, in the year in which a fund is non-complying, all the tax concessions applied to date are effectively recouped and it loses almost half its assets in a one-off tax bill. Furthermore, its assessable income would be taxed at 47 percent.

When should you seek professional advice?

Due to the severity of non-compliance, residency rules are critical and must be applied at all times. In this increasingly mobile world, it is crucial to consider the tax effects on SMSFs before the rules are breached.

Where are strategic and high-level decisions of the SMSF made? What constitutes central management and control of the SMSF? When is the safe harbour rule of temporary absence applicable? Who is an active member? Most importantly, how can you protect your retirement funds?

Our SMSF specialists would be happy to discuss these with you and develop a comprehensive strategy for your unique situation. Please call us at (08) 9367 7023 to schedule a consultation.

Category: Technical Articles