What You Need to Know
As an Australian lawyer with experience in self-managed super funds (SMSFs), I often come across clients who are unaware of the specific legal requirements that apply when they travel or live abroad for extended periods. One such requirement is the residency status of your SMSF. If you or any other trustee are planning to be out of the country for an extended period—especially two years or more—it’s crucial to understand how this could impact your SMSF’s compliance with Australian law.
The Residency Test: A Key Compliance Requirement
To maintain the concessional tax treatment of an SMSF, it must meet the “Australian Residency Test.” This test has three components:
1. The Fund Must Be Established in Australia: This means the initial establishment and the management of the fund must take place in Australia.
2. The Central Management and Control (CM&C) Must Be in Australia: The high-level decision-making of the fund must occur in Australia. This includes making strategic decisions, formulating investment strategies, and managing the overall operations of the SMSF.
3. The Active Member Test: The SMSF must have at least 50% of its total assets linked to members who are active and Australian residents.
The second and third points become particularly important when a trustee or member travels abroad for an extended period.
The Impact of Being Out of the Country for Two Years
If you or any other trustee of the SMSF are overseas for more than two years, it could lead to the fund failing the residency test, particularly the CM&C requirement. This would have significant consequences, including:
Loss of Concessional Tax Treatment: If your SMSF is considered non-compliant, it may be taxed at the highest marginal tax rate (currently 45%), rather than the concessional 15% rate. This could drastically reduce the fund’s value.
Potential Need to Restructure or Wind Up the Fund: In some cases, you might need to transfer the fund’s assets to a public offer fund or wind up the SMSF entirely.
Proactive Steps to Ensure Compliance
To avoid these potential pitfalls, consider the following proactive steps:
1. Appoint a Local Trustee or Director: Before leaving Australia, appoint a resident trustee or director who will stay in the country to manage the SMSF’s central management and control. This could be a trusted family member, a professional trustee, or a corporate trustee.
2. Use a Power of Attorney: Granting a Power of Attorney to a trusted individual in Australia can ensure that someone can make decisions on your behalf, keeping the CM&C in Australia.
3. Review Your SMSF’s Structure: Consider restructuring your SMSF if you anticipate being overseas for a long time. This might include transferring assets to another fund that doesn’t require the same residency conditions.
4. Plan for the Future: If you plan to be overseas for more than two years, consult with a financial advisor or lawyer specializing in SMSFs. They can help you navigate the complex residency rules and ensure your SMSF remains compliant.
5. Regularly Monitor the SMSF’s Status: Even if you are overseas, stay involved in the decision-making process as much as possible. Regularly check in with the local trustee or director and review the fund’s activities.
6. Document Your Absence and Intent to Return: Keeping thorough records of your travel plans, reasons for being overseas, and intent to return can help demonstrate that the CM&C is still in Australia, even if you are abroad for an extended period.
Conclusion
Managing an SMSF while living overseas can be challenging, but with careful planning and a proactive approach, you can ensure that your fund remains compliant with Australian law. Understanding the residency requirements and taking steps to maintain central management and control in Australia are essential to protect your retirement savings. Always seek professional advice tailored to your specific situation, especially if you plan to be out of the country for two years or more.
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