More Australians are spending their work or retirement years overseas. This will certainly remain the case even after COVID-19 travel restrictions are lifted.
If you are planning to become part of one and have an SMSF, you should be aware of the residency requirements. Failure to do so may result in loss of tax benefits, penalties, or forced liquidation of the fund.
The tax benefits available under Australia’s superannuation laws are worth protecting, particularly for high income earners with high marginal tax rates.
Member contributions and fund income of compliant Australian SMSFs are taxed at the preferential super tax rate of 15%, rather than the marginal tax rate, up to certain contribution limits.
One of the requirements for being a ‘compliant superannuation fund’ is that an SMSF must also meet the ‘residency test rules’.
need to know
In its May 2021 Budget, the Morrison Government proposed relaxing SMSF residency requirements as follows:
Extends the safe harbor test for central management and controls from two years to five years. Permanently remove active member testing.
These measures will allow SMSF members to continue making superfund contributions while temporarily working or studying abroad, creating a more level playing field with larger APRA-regulated funds. will be ensured.
Albanon’s new government pledged to advance these changes in the October 2022 budget, but as of December 2023, there has been no further progress toward enacting this reform into law.
Until the proposed reforms (see above) become law, it is important to understand the current rules.
What is the SMSF Residency Test?
There are three residency rules or conditions that must be met for an SMSF to be classified as an Australian super fund.
Rule 1
The initial contribution to establish an SMSF must be paid and accepted in Australia (or the fund must have at least one Australian-based asset).
This is the simplest of the three tests and is unlikely to cause problems.
Rule 2
The ongoing management, operations and decision-making of an SMSF must normally take place in Australia.
It is important to remember that all members of an SMSF must also be trustees, responsible for ensuring legal compliance. An administrator can obtain professional advice regarding the management and compliance of her SMSF, but cannot outsource residency rules to a third party.
Trustee functions may be temporarily performed outside Australia for up to two years and fund members/trustees may be temporarily relocated.
However, the two-year rule does not apply if central management and control is permanently transferred outside Australia, even if the stay is for less than two years.
Conversely, if you move abroad temporarily for less than two years and end up staying for more than two years due to events beyond your control, mitigating circumstances will be taken into account.
The government has proposed extending the two-year so-called safe harbor test to five years, but experts say it would do little to improve the existing test’s inconsistencies. They apply if central management and control has been outside Australia for less than five years, regardless of whether the absence is temporary or long-term, and regardless of whether circumstances change over time. They argue that it is much better to apply 5 years instead of 5 years.
Alternatively, there could be an amnesty period to resolve the issue if the fund no longer meets the test, rather than risk immediate non-compliance as is currently possible.
See What happens if I breach the SMSF residency rules? Under.
Rule 3
An active member of the Fund (i.e. a member making contributions to the Fund or receiving contributions on his or her behalf) must be Australian resident and must own at least 50% of the Fund’s assets (or at least 50% of the amount payable to the member). 50%).
For example, if an SMSF has four members and only three of them are making or receiving contributions, the SMSF has three active members. To meet the 50% test, the balances of these three members must be at least her 50% of the total fund balance.
Alternatively, a fund with no active members meeting residency rules 1 and 2 can still be classified as an Australian super fund.
The proposed reforms would allow SMSF members who have moved overseas and are no longer Australian tax residents to continue contributing to the fund. This creates potential problems, such as a multigenerational SMSF becoming a non-resident fund for all members if their adult children move abroad and continue to make contributions after they retire and stop making contributions. The points will be removed.
Super tip: Rollovers received by an SMSF are now treated as a contribution to rule 3 of the habitability test. Please keep this in mind if you plan to contribute to another super fund other than your SMSF while abroad. These benefits should not be combined with his SMSF with rollover until he returns to Australia, as active member testing will be an issue for the SMSF.
What should I do before moving abroad?
If you are considering a long-term move abroad and do not want to risk breaking these rules, you should consider seeking professional advice on maintaining your immigration status.
To avoid the risk of an SMSF becoming non-compliant due to residency issues, members who are not currently resident in Australia must make a contribution or make a contribution on their behalf to ensure they are not an active member. Please avoid receiving it.
Instead, any donations must be made to a retail or industry super fund. If the member/trustee returns from abroad, these account balances can be rolled over into her SMSF.
What happens if I violate the SMSF residency rules?
SMSFs that fail to meet any of the three residency rules may be classified as non-compliant by the ATO. This could result in the fund’s assets being frozen and its income (member contributions and investment income) being taxed at the highest marginal tax rate (45%).
The ATO also has powers to order non-compliant SMSFs to be liquidated and members’ funds transferred to public super funds.
However, the ATO will consider mitigating circumstances before imposing penalties on SMSFs that breach residency rules, as highlighted in the two recent decisions below.
Case study 1
The COVID-19 health crisis has created great uncertainty about international travel, with many countries imposing travel bans and restrictions.
The couple had been trying to return to Australia after spending just under two years overseas, but were stranded overseas due to the pandemic. This forced absence resulted in them being away from Australia for over two years.
If an individual trustee of an SMSF or a director of its corporate trustee is stranded overseas due to COVID-19, the ATO will: It is stated as follows. Apply compliance resources to determine whether your SMSF meets the relevant residency requirements. ”
Case study 2
The couple were trustees of their respective SMSFs. They divorced and her husband moved abroad for the next two years and eight months. This meant that the SMSF was in breach of Residency Rule 2.
The ATO could have retroactively taxed the fund’s income at the highest possible rate for each of the three financial years in which the husband was absent. This will result in a one-off tax charge of more than his 50% of the value of the SMSF’s assets.
However, the ATO decided not to impose the tax after considering three factors:
The husband and wife voluntarily disclosed the violation, the husband was terminally ill, and the couple’s super benefits were subject to a family court order as part of their divorce settlement.
Can I go back to Australia for a week every year to pass my test?
If you have lived overseas for an extended period of time (more than two years), returning to Australia for only a short period of time each year will not satisfy residency rule 2, that is, the condition that ongoing management and decision-making of the fund be in Australia.
Additionally, if you make a contribution to an SMSF during this period, you will be in breach of residency rule 3 (active members of an SMSF must be Australian residents). You cannot become Australian resident for tax purposes while living permanently or long-term overseas. This means you are not entitled to super tax breaks through your SMSF.
Are the retirement residency rules different?
no. Income from his SMSF funds during the retirement phase is tax-free, so breaching any of the three residency rules could result in the ATO revoking this tax-free status.
You can still make contributions as an eligible active member of an SMSF during your retirement period, but you must meet SMSF residency rule 3 (i.e. be Australian resident).
It’s also important that you don’t leave Australia for more than two years, even if you haven’t contributed to an SMSF and are spending your retirement traveling. Failure to do so will not comply with SMSF Residency Rule 2 (continuous management and decision-making of the fund must be in Australia) and the tax-free status of the pension will be at risk.
You cannot avoid this problem simply by not receiving a pension while living abroad for more than two years. That’s because there is a minimum pension payment that must be received in order to comply with the extra-legal regulations. This amount varies by age, as shown in the table below.
You cannot avoid this problem simply by not receiving a pension while living abroad for more than two years. That’s because there is a minimum pension payment that must be received in order to comply with the extra-legal regulations. This amount varies by age, as shown in the table below.
Recipient age percentage ratio 654% or less 65-745% 75-796% 80-847% 85-899% 90-9411% 95 or more 14%
Source: SIS Law
Can I set up an SMSF even if I live overseas?
Yes, as long as you return to live in Australia within two years of setting up your SMSF.
conclusion
Australian superannuation legislation provides generous tax benefits for compliant super funds, but to qualify for these benefits there are certain requirements that an SMSF and its members/trustees must meet. There are three residency rules you must follow. If an SMSF fails to meet any of these rules, it could have its assets frozen or its income taxed at the top marginal tax rate of 45%.
The information contained in this article is of a general nature. To determine how residency requirements apply to your particular SMSF situation, it is best to seek independent professional advice.
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