28/09/2015 – With the growth of Self Managed Super Funds (SMSF’s) in Australia the question of whether someone becoming a expat is able to continue using this structure is a common one. SMSF’s now comprise of about one-third of Australia’s AUD$2.04 trillion superannuation system so as you can see they are becoming more of an issue.
The general rule of thumb that I have followed is that it is easier to manage super assets under a public offer/retail super platform as opposed to a SMSF for a number of reasons but the main two are:
- You can’t contribute to a SMSF whilst you are a non-resident but you can if you use a public offer/retail super platform. This to me is the biggest issue because by not being able to contribute you are excluding a large number of strategies the can assist in building wealth and planning for retirement. You have to setup a separate public offer/retail super fund to receive contributions which adds to the cost and complexity of managing your super affairs.
- You can’t control your SMSF whilst you are a non-resident but you can if you use a public offer/retail super fund. As you will see below if you did want to maintain a SMSF then control must be maintained in Australia and all rights assigned accordingly. Who doesn’t want to control their own super fund?
So let’s say that even after addressing the above issues you still wanted to maintain a SMSF as a non-resident well the good news is that you can do it but make sure your ducks are lined up. Rather than wax lyrical about all the different rules I often find it easier to to talk about real world examples and there was a case recently were the Australian Taxation Office (ATO) provided a Private Binding Ruling (PBR) addressing the issue of whether a SMSF that pays a pension to a non-resident retains its residency status. Now this is a bit different because the SMSF has transitioned from Accumulation mode to Pension mode and the fund member has remained overseas and wants to start receiving a pension from his SMSF however I will outline the lengths they went to to achieve a compliant fund.
In this particular case the SMSF has a sole member of the fund and the trustee of the SMSF is a corporate trustee and the directors of the corporate trustee are the sole member, his spouse and a representative in Australia. In order to determine whether a SMSF is compliant and is treated as a Australian super fund, the fund must satisfy all three residency tests under income tax law (Income Tax Assessment Act 1997, s295-95 (2)). These tests are:
- Is the fund established in Australia or assets of the fund located in Australia – as the fund was established in Australia and the assets comprise of Australian shares and a Australian bank account then the fund passes this test.
- Central Management and control (CM&C) of the fund is ordinarily in Australia – the sole member has granted his representative in Australia, who resides in Australia and makes all decisions in relation to the fund, an Enduring Power of Attorney. This includes the acquisition and sale of investments, making buy/sell orders and operating the funds bank account.
- The active member test – with this test to be satisfied the fund has to either have no active member(s) or at least 50% of:
- the total market value of the funds assets attributable to superannuation interests held by active members; or
- the sum of the accounts that would be payable to or in respect of active members if they voluntarily ceased to be members;
is attributable to superannuation interests held by active members who are Australian residents. In this case as the member has made no contributions to the SMSF since he became a non-resident he is not considered to be a active member and as such the SMSF passes the active member test.
If you aren’t able to meet the residency tests then the status of your SMSF will change from complying to non-complying and that’s where the trouble starts. All of the SMSF’s assets that have been accumulated over the years (minus member contributions received by the SMSF where no deduction has been claimed) plus earnings on investments received in the financial year the SMSF becomes a non-complying SMSF is taxed at 47%. Going forward for every year that the SMSF remains a non-complying fund the income that is received will also be taxed at 47%. And it doesn’t finish there. When you return to Australia and your SMSF becomes compliant again all of its assets (minus member contributions) are assessable income of the SMSF in the year that the SMSF becomes compliant again and will be taxed at either 47% (if the SMSF members return to Australia during the financial year) or 15% (if they return to Australia for the full financial year). It doesn’t take a mathematician to work out that if your SMSF is deemed non-compliant then there is a very real chance you may lose the majority of your super fund balance. To find out more on how the ATO handle non-compliance please go to this link on their website.
So as you can see if you did want to maintain a SMSF whilst you are a non-resident there are a large number of hoops to jump through which may or may not suit your personal circumstances. As always your best course of action is to speak to a specialist who not only understands the current superannuation rules but also in how they apply to Aussie expats who are classified as non-residents.
If you would like to read the full ATO report please go to this link.
This article has been reproduced from a LinkedIn post written by Brett Evans who is the Managing Director of Atlas Wealth Management. To read this post as well as many others that he has written on LinkedIn go to this link.
Disclaimer – the above commentary is general in nature and should not be construed as tax or financial advice. Please consult a licensed tax accountant and financial adviser to determine whether the above information is suitable for you.