SMSF residency rules: the 3 tests an SMSF must meet
An Australian super fund must meet three rules. At all times, the fund must:
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have been established in Australia or have assets in Australia.
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be ordinarily controlled within Australia (the term used for this is that “central management and control” is ordinarily in Australia), and
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pass an active member test.
Establishment or assets in Australia
An SMSF will meet this rule forever as long as it’s established in Australia, for example, if the original trustees and members were physically in Australia at the time. Most funds have no problem with this one. (If all the trustees are overseas at the time the fund is set up, the fund is likely to have problems with the other two tests.) But even if the fund is somehow not established in Australia, it can still meet this first test if it always has some assets in Australia – even a bank account will do.
This test is usually not the problem.
Central management and control
Central management and control is about high level decision making rather than basic administrative tasks. For example, deciding on the fund’s investment strategy or making a decision to pay out a death benefit to a particular beneficiary would be high level decisions. But acting on these decisions at an administrative level (for example, making bank transfers) is not.
In an SMSF, the trustees should be the people exercising high level control. So this test requires they ordinarily do this when physically located in Australia. There are a few points to note here:
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If there are multiple individuals trustees (or directors of the trustee company), it’s generally OK for some of them to be overseas and some to be in Australia. In fact, even a 50/50 split is reasonable as long as they’re all genuinely sharing the decision making,
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The test is all about where control “ordinarily” resides. It’s fine for trustees to have an overseas holiday and make important decisions about their SMSF while they’re away. Where it becomes more important is when the trustees move overseas and don’t have a fixed plan to return. Or where their stay is expected to be long term. All these would call the central management and control test into question.
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Whether or not the trustees are Australian tax residents doesn’t matter for this test (although it might be for the next test). It’s all about where they are physically located when they make decisions about their SMSF.
Active member test (the 50% rule)
This test is all about residency for tax purposes.
The first step is identify the fund’s “active” members. These are people for whom contributions are still being received. The definition of contributions for this purpose doesn’t just include personal contributions or contributions from an employer, it also includes rollovers from other super funds (either Australian or foreign funds). However, someone who is (say) 80 and no longer making or receiving contributions would not be an active member.
Some funds have no active members – they will meet this test automatically as long as no-one becomes an active member by (say) making a contribution.
But for funds that do have active members, the test is as follows:
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add up the super balances for all the active members, then
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add up the super balances for just the active members who are also Australian tax residents.
If at least 50% of the money belongs to Australian tax residents, the active member test is met.
Can I keep my SMSF if I move overseas?
People who move permanently often wind up their SMSF and rollover to a retail or industry super fund. (Unfortunately they can’t take their Australian super to their new home unless they have also met a condition that allows them to withdraw their super such as being over 60 and retired.)
People who move temporarily often keep their SMSF going and take some extra steps.
For example, Jake and Gabby are moving to New York – Gabby has been offered a 12 month secondment to her firm’s New York office. Jake doesn’t have any fixed plans for his time in the US. They intend to come back after the secondment – they’ve kept their home and rented it out for the year, their furniture and other belongings will be in storage or looked after by Jake’s parents.
Their situation looks like a short term move. They have a definite plan to move back and have clear links to a future in Australia. Gabby and Jake could actually argue central management and control of their fund remains ordinarily in Australia the whole time. They would just need to make sure no contributions, rollovers or any other “new” money (other than investment income) was put into their fund for them while they were away. That would allow their SMSF to meet both the central management and control and active member tests.
This is true for both Gabby and Jake even though Jake isn’t being taken overseas by his job - he’s accompanying Gabby. It may even remain true if Gabby’s secondment was extended. But everything would change if they changed their mind and decided to stay.
For this reason, people in Gabby and Jake’s position often take an extra step to make sure they’re protected against future changes impacting their SMSF.
For example, they could ask someone else (Australian based) to be the trustee of their SMSF in place of one or both of them. For example, what if Jake remains a trustee but Gabby is replaced by her mother, Jenny? This is allowed as long as Gabby gives Jenny an “enduring power of attorney”. Jenny could them be formally appointed as a trustee and Gabby would resign without breaking the normal rules about all members being trustees and vice versa. But it’s important Jenny and Jake actually do the decision making jointly – it couldn’t all be done by Jake and/or Gabby with Jenny just acting on their instructions.
It’s not something to do lightly and good advice is crucial. It’s also important to make all these arrangements before leaving Australia.
What happens if we get SMSF residency wrong?
It’s one of those rare situations with SMSFs where it’s a disaster with no solution. Failing any of these tests at any time means the fund immediately stops being an Australian super fund. The ATO has no scope to exercise discretion or take no action, the fund will stop being a “complying” super fund. And that has severe consequences. Not only does the fund lose all the usual super fund tax concessions but there will be a special once off bill at the time it happens. This bill could be close to half of the fund’s assets at the time.
