The thought of losing half the value of their self-managed superannuation fund terrifies most members but for those who make changes to their Australian tax residency, this risk has been quite real. With the recent federal budget proposing a relaxation of the residency rules for SMSFs, however, the threat of non-compliance and being taxed at the top tax rate may not be as big a threat.
When assessing the compliance of an SMSF with respect to current residency rules, there are two key hoops to jump through.
First, there is a requirement that the central management and control resides in Australia at all times. The central management and control test has been explained by the ATO as the “high-level” decisions made by the trustees of the SMSF.
With a more mobile workforce these days, SMSF members moving overseas for work have had to make a decision before departure as to whether they were leaving on a temporary basis because the law referenced the central management and control ordinarily being retained in Australia.
In other words, if someone could demonstrate that any move would be temporary, then they could retain the trustee arrangements given the central management and control would continue to ordinarily remain in Australia.
There has also been an added degree of confusion about a “two-year” rule whereby there was an understanding that someone could be overseas for up to two years before there was any need to consider the central management and control issue.
This is not the case, and this two-year rule was only relevant when the move overseas could be shown to be temporary. This safe harbour edict has often been confused because there can be situations whereby someone is not leaving Australia on a temporary basis and, as such, by the letter of the law they would then be in breach of the central management and control requirements if they continued to make the high-level decisions concerning the SMSF while a non-resident, even if they were, in fact, away for less than two years.
The budget announcements propose to increase the safe harbour time period from two years to five years.
However, it is incredibly important to note that the required connection to a temporary absence is still in place. For example, this proposed change would not allow someone to leave Australia on a permanent basis and continue to make high-level decisions for the SMSF as the trustee, even if the period of absence ended up being less than five years.
It becomes even more convoluted where the intention changes from a temporary absence to a permanent absence while overseas, as this would require an immediate change. Often the best solution for SMSF trustees is to appoint a power of attorney to take their place while non-resident, and ensure that they make the high-level decisions for the SMSF to ensure there are no questions concerning central management and control continuing to reside in Australia.
The second hoop under current residency rules relates to an “active member” test, which precludes non-resident members from making contributions (including rollovers) to their SMSF when it is essentially controlled by non-resident members.
This test has always placed SMSFs at a disadvantage to large public-offer superannuation funds which allows non-residents to add to their superannuation account. The budget announcements have proposed scrapping the active member test for SMSFs, which would be a welcome relief and certainly level the playing field.
With all budget announcements, the final legislation is always the key reading material. While there is definitely a driver to update and enhance residency rules, the implications of getting this wrong are still incredibly punitive for SMSFs, and not something trustees want to get wrong.