In order for a Self Managed Superannuation Fund (SMSF) to be a complying superannuation fund and receive the concessional 15% tax rate, it needs to be a resident regulated superannuation fund at all times during the income year and meet the definition of an “Australian Superannuation Fund” under subsection 295-95(2) of the Income Tax Assessment Act 1997. Changes to the residency of members and trustees can render your SMSF non-compliant and subject to penalty taxes. This is most important to consider when SMSF members are considering travelling overseas.

There are three conditions that an SMSF must satisfy to meet the definition of an “Australian Superannuation Fund”:

1. The SMSF must be established or situated in Australia

An SMSF is established in Australia if the initial contribution made to establish the SMSF was paid in Australia.  If the initial contribution was not paid in Australia, then the SMSF will still satisfy this test if at least one asset of the SMSF is situated in Australia.

2. The central management and control of the SMSF must ordinarily be in Australia

The individual in the SMSF who makes high level decisions such as formulating, reviewing, updating the investment strategy, and determining how the assets of the SMSF are to be used to provide member benefits, is said to have the central management and control of the SMSF.  If this person is in Australia, then the SMSF satisfies this test.  However, if this person is not in Australia then the SMSF will still meet the test as long as this person is temporarily outside Australia for a period of not more than two years.  If this person is outside of Australia for a period of greater than two years, then the SMSF will still satisfy this test if it can be proved that although this person is outside of Australia for more than two years, their period of absence is temporary.

3. The SMSF has no foreign active members

An active member is a member who contributes into the SMSF or on whose behalf contributions have been received.  The trustees of an SMSF need to ensure that any contributions received in the SMSF are contributions made for the members during the period they are or were in Australia.  If contributions are received for or from a foreign active member (i.e.  while members are overseas), then the trustees need to ensure that at least 50% of the total assets in the SMSF belong to resident active members.

It is easy for SMSFs to satisfy the first condition as most SMSFs assets are situated in Australia.  It is also quite easy for SMSFs to satisfy the third condition by ensuring that you do not make contributions into the SMSF for members while they are overseas.  It is often central management and control condition that can be hard to satisfy.

Is the central management and control of the SMSF “ordinarily” in Australia?

Whether or not the central management and control of the SMSF is ordinarily in Australia is determined by examining whether, in the ordinary course of events, the central management and control of the SMSF is regularly, usually or customarily exercised in Australia.  It is the period of absence of the central management and control that must be temporary.  The central management and control of an SMSF will be “temporarily” outside Australia if the person or persons who exercise the central management and control of the SMSF are outside Australia for relatively short period of time and during that time they exercise the central management and control of the SMSF overseas.  The duration of the absence must either be defined in advance or related to the fulfilment of a specific, passing purpose.  The test must be applied at the relevant time during the year.  The test is a “real time” test.  The test is not applied retrospectively or with the benefit of hindsight. 

Gold and Platinum members read on for examples of how these tests are applied.

Common mistakes

Because the law stipulates a two year period of absence, a lot of people misinterpret this by thinking that as long as they are overseas for a period of no more than two years, their SMSF would remain a resident fund. However, it is not just the time period of two years that is considered, it is also the intention of the trustee and the purpose of going overseas.

Due to the requirements for your SMSF to maintain its complying status and meet the definition of an Australian Superannuation Fund, if you are planning to travel overseas you may need to consider putting in place an Enduring Power of Attorney. This appoints someone to act as the resident trustee of your SMSF and maintains your fund’s compliance.

This article was prepared by Monica Rule.  Monica is the author of The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English which is available from Law Central <here>.

Build these documents now:

• Self Managed Superannuation Fund Trust Deed
• SMSF - Deed Update
• Investment Strategy for Self Managed Super 13/14
• Enduring Power of Attorney - NSW
• Enduring Power of Attorney - QLD
• Enduring Power of Attorney - SA
• Enduring Power of Attorney - VIC
• Enduring Power of Attorney - WA