21 Apr Legal Implications of Non-Residency For Your SMSF
This week’s technical update will cover: Legal Implications of Non-Residency For Your SMSF
Many people these days work overseas for a period of time, and others just travel for extended periods of time. This article outlines the legal implications if people in this situation are members of a SMSF.
It seems that many people are not even aware that there are serious legal issues to be addressed before they depart Australia for extended periods of time when they are a member of a SMSF.
The financial penalty of getting this wrong is significant in that your SMSF’s assets and income will be taxed at a rate of 47%. As such SMSFs may not be appropriate for people who spend extended periods of time overseas.
The Issues
For a SMSF to remain a complying superannuation fund and obtain the generous tax concessions available to super funds there are certain requirements be met.
A complying SMSF must be an “Australian superannuation fund” and to be an Australian superannuation fund two important requirements must be met.
- Central Control & Management of the fund must be carried out in Australia. This relates to all the high level and important decisions being made here in Australia and;
- Active member test which relates to contributions to a super fund on behalf of members who are residents in Australia. Being overseas means you should not have any contributions made to your SMSF whilst overseas as you will most likely fail this test. This can have serious implications, for example, if you have acquired an investment property using borrowings such as a limited recourse borrowing arrangement. How will you meet your interest and/or capital repayments if no further contributions are being made to your fund whilst you are overseas?
It is the Central Control & Management (CM & C) requirement that is easily breached. However, there are strategies that you can put in place to ensure compliance with the law.
Practical Strategies to manage the CM & C Issue
Firstly, if you intend to be overseas for a period of two years or less, and will make occasional return trips to Australia during that period, then you will meet the requirements and do not need to take any further action.
However, if there is any chance your period overseas will exceed two years or your employment contract for the overseas work is fluid and could be extended past two years you do have a problem which must be addressed before you leave Australia.
The best solution is to hand over control and management of your SMSF to another person living in Australia who you trust completely.
This handing over control is achieved by each member who is living overseas putting in place an Enduring Power of Attorney. This is a legal document prepared by a solicitor. It must be an Enduring Power of Attorney and not a general Power of Attorney to comply with the law.
You may wish to restrict this Power of Attorney to deal only with your SMSF or it could be open ended to deal with all your financial affairs whilst you reside overseas.
Practical Implications
Once you finalise the Enduring Power of Attorney you must resign as an individual trustee, or the director of the corporate trustee, of your SMSF. The person or persons you nominated as your attorney becomes the new trustee(s) or director of the corporate trustee.
In a two member SMSF, for example, a husband and wife scenario both of you may appoint the same person to act as your attorney. If you have children whom you have nominated as attorneys you may nominate one or more of them to act as trustee/director.
An Alternative Strategy
The other option is to wind up your SMSF and roll over your benefits to a retail or industry super fund. However, if you have long term investments such as property in your SMSF this may not be the most appropriate solution.
Conclusion
You must get this right because if the ATO discovers you have breached the law in this area, it is a non compliance issue which the ATO does NOT have the power to waiver or simply request rectification of the breach.
The penalty for breaching these provisions is that your SMSFs assets and income are taxed at 47%, almost half the fund’s value.
Therefore, any person who is a member of a SMSF who is considering spending an extended period of time overseas should immediately seek professional advice well in advance of their departure from Australia as advice and preparation of the necessary legal documents and related paperwork takes some time to complete.