Residency Rules

Trustees must ensure to comply with the Residency rules. SMSFs that breach the rules are taxed at the highest marginal rate of 45% instead of the concessional rate of 15%.

Trustees can set up and manage a self-managed superannuation fund from overseas if they are outside Australia temporarily. The ATO’s temporary absence rules generally allow a Trustee to be overseas for no more than 2 years, though exceptions can be made due to certain circumstances.

What is the test for Residency?

The SMSF should meet the following three criteria:

  1. The SMSF was established in Australia, or at least one of the SMSF’s assets must be located in Australia
  2. The central management and control of the SMSF is ordinarily undertaken in Australia; and
  3. At least 50% of the SMSF Membership must be in Australia, measured by market value (the Active Member test).

The 3 criteria are discussed below.

Criteria 1: Fund established in Australia

An SMSF is established in Australia when the initial contribution to the SMSF is paid to and accepted by the Trustees in Australia. The Trust Deed does not have to be signed and executed in Australia.

However, an SMSF established outside Australia will satisfy the test if at least one of the Fund’s assets is situated in Australia.

Criteria 2: Central management and control must be in Australia

According to the ATO, the central management and control involves the high-level decision-making processes and activities of the SMSF. The SMSF will be resident where the central management and control takes place.

Criteria 3: The Active Member test

The third test is the ‘active member’ test. This is satisfied when at least 50% of the market value or Fund value is held by active members who are Australian residents. You can only apply for a Self-Managed Super Fund if you are an Australian citizen for Tax purposes. There are 4 tests which are in place to see if you are considered as an Australian resident.

  1. The Resides Test – This is the primary test for tax residency and if you reside in Australia you are automatically considered and Australian resident for tax purposes. Certain factors that determine your residency status are your intention and purpose in Australia, where your family are located, your current employment situation and where your main assets are held. If you are unable to satisfy this test you can still be considered an Australian resident if you satisfy one of the other tests as noted below.
  2. The Domicile Test: A domicile is considered to be your place of birth or where you are currently living with the intent to remain there permanently. You are considered an Australian resident if your domicile in located in Australia.
  3. The 183-day Test: Individuals who are arriving from overseas to Australia will be a resident under this test if you are present for more than half the income year.
  4. The Commonwealth Superannuation Test: This test only applies to Australian government employees working internationally for Australian posts or who are member of a PSS and CSS schemes.

More information

Click here to view the ATO’s guidance on SMSF residency and find out more about super fund residency rules. Please also see here for the ATO’s ruling on tax residency. Further, from the ATO Legal Database, see the relevance of the 2-year rule:

The ‘two-year rule’

The central management and control of the fund can be taken as ordinarily in Australia even if it is temporarily outside Australia for periods of no more than two years. Unfortunately, the two-year rule is sometimes misunderstood. To clarify: it is not an exception available to all Trustees irrespective of the facts and intentions surrounding their absence.

If an absence is permanent, the two-year rule does not apply. Even an absence of less than two years could be ‘permanent’ and the central management and control could therefore be outside Australia (e.g. if a Trustee or Trustees departed with the intention of being away indefinitely but returned after only 18 months due to ill health).

Conversely, in certain situations, an absence of more than two years may be acceptable. This could be the case for example if a Trustee, leaving the country with the intention of being away for a defined period of less than two years in order to fulfil some specific purpose, was forced to remain overseas due to unforeseen circumstances. In a case such as this, the ATO would normally be satisfied that central management and control of the SMSF continued to be ordinarily in Australia.

If 50% of the Trustees are in Australia and 50% overseas, the central management and control of the Fund is in Australia if both sets of Trustees equally participate in exercising the central management and control, however, the ATO takes the view that this would rarely be the case.

Power of Attorney

Trustees can still be part of a SMSF even if they are overseas on a permanent basis. This is made possible by taking out a Power of Attorney for the management and control of the SMSF. If the majority of Members are overseas, do not contribute to the SMSF as the Active Member Test may trigger the residency of the Fund.

Private Ruling on Residency Status and EPOA

We applied for a Private Ruling on an SMSF where the Members moving overseas appointed power of attorneys before leaving Australia. The Private Ruling resulted in a positive outcome and the Fund continued to remain compliant as long as the Members meet the three residency tests. Below is the sample of the Private Ruling:

Click on the button below for a POA download:

Q: What should Trustees do if an SMSF fails to meet the Residency Rules?

A: Trustees of SMSFs that are not classified as Australian superannuation funds are required to disclose this information to the Australian Taxation Office (ATO) in the SMSF annual return. This disclosure should be made in Question 8, which pertains to the status of the SMSF. Trustees should also disclose their status to the ATO through the SMSF early engagement and voluntary disclosure service.

As a precaution, Trustees can appoint Power of Attorney to ensure that the central management of the Fund is in Australia. We can assist with the appointment of a Power of Attorney for your Fund.

Q: How does failure to meet Residency Rules affect audit outcomes?

A: Auditors may not lodge an Auditor Contravention Report (ACR) solely to report a violation if the audit client is no longer an Australian superannuation fund.

However, when an SMSF no longer meets the definition of a complying superannuation fund, there is a substantial risk that the ATO will issue a Notice of Non-compliance in the future, potentially backdating it to the year when the fund became non-complying. This change in the SMSF’s status becomes a “key audit matter” as defined in Auditing Standard 701, which requires it to be described in the Independent Auditor’s Report. Additional details can also be provided in a management letter addressed to the Trustees.

ATO’s advice on this matter can be viewed here.

Q: What are the tax consequences if an SMSF is listed as non-compliant?

A: Failing to qualify as a complying superannuation fund poses a significant risk for an SMSF as it may result in the ATO issuing a Notice of Non-compliance. Tax consequences of receiving such a notice are:

  • In the year it becomes non-complying, the assessable income is taxed at the highest marginal tax rate. The assessable income includes an amount equal to the market value of the fund’s total assets less any contributions the Fund has received that are not part of the taxable income of the fund.
  • For every year the Fund remains non-complying, its assessable income is taxed at the highest marginal tax rate.

To determine whether an SMSF has received a Notice of Non-compliance, Trustees can perform a search on the Super Fund Lookup website.

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