So you’re thinking of going overseas for a year or more and you want to know what to do with your self-managed super fund.

Stop! Before you get on that plane, you need to know that your super fund could be taxed at 46.5% on the market value of its assets (less non-concessional contributions). And, to add insult to injury, this exorbitant tax rate will apply to any assets in your fund backing a pension and it might be applied again when you return to Australia.

So, how can you avoid this extreme penalty?

Firstly, if you think you can sort this issue out after you’ve left Australia, think again – you must get your affairs in order before you leave.

The tax laws that deal with what’s called the ‘residency status’ of your fund say that you can be absent from Australia for up to two years before these tax penalties apply.

However, the tax office also says that this concession will only apply if the time you intend to be out of Australia is a definite period of time that is known before you leave this country, and that you’re away doing a specific job that doesn’t change during your absence.

The reality is that most Australians working overseas have no certainty about how long they’ll be away. In fact, it may be hazardous for you to assume that you’ll be able to satisfy this particular rule if you intend to work overseas for an indefinite period or there’s a chance the nature of your work will change.

Basically, you need to be living in Australia to run an SMSF and receive the associated tax benefits.

So, it’s very important that while residing overseas, you don’t make any contributions to your SMSF – either for yourself or on behalf of someone else. The fund will be hit with some huge tax penalties if you do. This is because the tax laws contain a rule called the ‘active member test’. (In brief, an active member is essentially someone who makes or receives super contributions during a financial year to a particular super fund.)

On the other hand, it would be OK to contribute to a large retail super fund while overseas. But be aware that some retail funds don’t accept contributions from overseas residents.

Another rule that needs to be satisfied says that a super fund asset has to be held in Australia at all times. You’ll satisfy this rule if you keep an Australian bank account open.

There are several ways to handle this residency issue:

Option 1:

Resign as trustee and appoint an Australian Prudential Regulation Authority approved trustee to be the trustee of your fund while you’re overseas. This will mean your fund will cease to be an SMSF and will become a ‘Small APRA Fund’. There are only a few companies that provide this type of trustee service and many of them place restrictions on the type of assets that your fund can hold. For example, some of them don’t permit direct property holdings.

Option 2:

Resign as trustee and appoint someone as your enduring power of attorney who will act as trustee in your absence.

The person holding the enduring power of attorney (EPoA) will be able to act fully on your behalf, so you will have to be very comfortable with and confident in the person you appoint.

Each State and Territory has specific legislation that deals with this issue and all these rules allow the attorney to exercise their powers when the donor is mentally capable. The ATO has said that an enduring power of attorney invoked when the donor is mentally capable will satisfy the relevant super laws.

Once the EPoA has been granted, the attorney can then be appointed a trustee of the self-managed super fund at the appropriate time. When they are appointed, the member must be removed as a trustee.

Before this appointment takes place, the super fund’s trust deed and relevant State or Territory legislation should be carefully examined. If a super fund has a corporate trustee, then the constitution and the Corporations Act 2001 need to be carefully reviewed.

Option 3:

Close your SMSF down before leaving Australia and then open a new one when you return.

As you can see, there are some important issues to consider. If you’re already overseas and you haven’t done anything about your SMSF, then I strongly encourage you to get some advice as quickly as possible.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in today’s Switzer Super Report

• Peter Switzer: How much do you need in your SMSF for retirement
• Charlie Aitken: Don’t be fooled by the relief rally
• Alia McMullen: How to protect your death benefits from tax