By Monica Rule

I recently presented a seminar on Superannuation Law for Self Managed Superannuation Funds (SMSFs) and was surprised by the number of people who were not aware of the requirement for their SMSF to maintain its Australian residency status in order to receive tax concessions as a complying superannuation fund.

You see, it is not enough that an SMSF is established and structured correctly under either a corporate trustee structure or individual trustees’ structure. In order for an SMSF to be treated as a regulated complying superannuation fund, it needs to be an Australian resident fund too. 

What I am referring to here is the residency status of the SMSF and not the residency status of the SMSF members, although the residency status of the members can also affect the residency status of their SMSF, which I will explain later.

In Bulletin 446 issued on 12 November 2013, I explained the three (3) tests that an SMSF must meet in order to be treated as an “Australian Superannuation Fund” under the Income Tax Law.    Just to refresh your memory the three (3) tests are:

1. The SMSF is established in Australia or any asset of the SMSF is situated in Australia.
2. The Central Management and Control of the SMSF is ordinarily in Australia.
3. The SMSF must satisfy the active member test.

In this article, I will elaborate on what the “active member test” is, as a lot of people are misinterpreting this test. Many people are not aware of how easy it is to fail this test when travelling overseas.

A member of an SMSF is considered to be an “active member” if they contribute to their SMSF or if contributions are made to their SMSF on their behalf (e.g. by their employer).  If an SMSF member is no longer an Australian resident for income tax purposes, then they will also become a non-resident member.  Under the active member test, if an SMSF has any non-resident members, and the non-resident members make contributions into their SMSF, then the aggregate of their superannuation balances must not be more than fifty per cent (50%) of the aggregated of the balances of all resident active members of the SMSF.

For the purposes of the residency test, the concept of “contribution” is much broader than what most people typically think. It includes:

• cash contributions made by employers or members of the SMSF
• transfer of assets as in-specie contributions
• spouse contributions
• Government superannuation co-contributions
• a rollover superannuation benefit received by the SMSF
• a director termination payment
• a lump sum superannuation payment paid from a foreign superannuation fund
• superannuation guarantee shortfall amounts
• transfers from the Superannuation Holdings Special Account

If contributions are received for a member of an SMSF while the member is a non-resident, and the contributions when added to the balance of the non-resident member amounts to more than fifty per cent (50%) of the total balances of active members, then the SMSF will fail the residency test.

SMSF members and trustees are getting this test wrong by just measuring the balance in the SMSF of resident members against the balance of non-resident members.  You see, it is not the balances of all members it is only the balances of all “active” members that are measured for this test.

If members who hold at least fifty per cent (50%) of entitlements remain in Australia while other members go overseas, it will be necessary for each resident member to be classified as “active” members by having contributions made for them into their SMSF, if the overseas members also make contributions. You can see how this becomes very difficult for most SMSFs where the majority are two member funds composed of a married couple. They generally travel together.

If the superannuation balances of resident active members are less than fifty per cent (50%) of the total balance of all active members or resident members with at least fifty per cent (50%) of the total balance fail to make a contribution while a non-resident member does, the active member test would not be satisfied and the SMSF would fail the residency status.

SMSF trustees must consider the impact of any contributions into their SMSF while any member is a non-resident.  Basically, non-resident SMSF members should not make contributions into their SMSF if their balance in the SMSF is at least fifty per cent (50%) of the total assets that belong to active members.

If the SMSF becomes a non-resident superannuation fund, it is a non-complying SMSF and its earnings plus assets less any personal non-deductible contributions will be taxed at a whopping 47% in the first year of non-residency.  Then each year thereafter its earnings will continue to be taxed at 47%.

Example 1:  resident member is not an active member

John and Laura are members of their SMSF.  John’s superannuation balance is $200,000 and Laura’s superannuation balance is $50,000.  Laura moves to London for work and become a non-resident for income tax purposes.  Laura makes a contribution into her SMSF of $10,000 while she is overseas.  John did not make any contributions into their SMSF in that financial year and therefore is not an active member.  Their SMSF will fail the residency test because even though John’s superannuation balance is more than 50% of the total balance in their SMSF, he is not an active resident member.  

Example 2: SGC made during the period of residency - not an active member

Crystal, who is a single member of her SMSF goes overseas on a holiday in July 2010 for an indefinite period of time.  Crystal ceases being an Australian resident in July 2012 under the Income Tax Law.  Before travelling overseas, Crystal worked for a local health and fitness centre.   Her employer failed to make any superannuation contributions during the period of work performed by Crystal in the quarter prior to her departure (April 2010 to June 2010).

In August 2012, Crystal’s former employer pays the superannuation guarantee charge (SGC) to the Australian Taxation Office which then distributed the shortfall component of the SGC to Crystal’s SMSF in September 2012.  Crystal makes no personal contributions into her SMSF during her absence from Australia.

As Crystal is a non-resident from July 2012 and the contribution, that is the shortfall component of the SGC was made to the SMSF on her behalf for the April to June 2010 period when she was a resident, Crystal does not become an active member because of the contribution. Crystal’s SMSF will maintain its residency status provided the other two tests are also met.

Example 3:  SG contributions made into an SMSF while overseas

Assume in this case, Crystal was asked by her Australian employer to work in their London office for a period of 3 years and under the taxation law Crystal became a non-resident from 1 July 2012.  Her employer paid superannuation guarantee contributions into Crystal’s SMSF during the periods 1 July 2012 to 30 June 2013.  Crystal did not make any personal contributions into her SMSF.  Because Crystal’s employer made contributions for Crystal, Crystal will become an active member and her SMSF will lose its residency status and become a non-complying SMSF.    

For Gold and Platinum members read on for further examples of various situations where an active member test is triggered causing an SMSF to lose its Australian residency status and becoming a non-complying superannuation fund.

This article was prepared by Monica Rule who worked for the Australian Taxation Office for 28 years and is an SMSF Specialist Adviser.  Monica is the author of The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English – www.monicarule.com.au

Build these documents now:

• Self Managed Superannuation Fund Deed
• SMSF - Deed Update
• Pension Pack for Self Managed Super
• Investment Strategy for Self Managed Super 14/15
• The Self Managed Super Handbook