Last month I wrote about a couple who were planning to travel overseas for three years and, while away, they wanted to continue running their business and their SMSF. You can read that article here [1].
They wisely chose to ask the ATO if their SMSF would retain its residency status while they were out of Australia on holidays.
This was an important question for them because if the fund was a non-resident super fund it would be taxed very heavily. In the first year a fund becomes non-resident, the Government would take almost half the assets of the fund less non-concessional contributions in tax.
For every other year the fund is non-resident the fund will pay 46.5% on normal income. Non-resident funds are also deemed to be non-complying super funds and the couple’s employer wouldn’t be allowed to contribute the 9% Superannuation Guarantee.
Super residency tests
As detailed in my previous article, there are three tests to determine if a fund is a resident super fund:
- The fund must have been established in Australia or a fund asset must be situated in this country.
- The central management and control of the fund is in Australia.
- The fund has no active members, or if it has active members then the assets of resident active members are more than 50% of all assets of active members (active members are, in general, those members who receive or make super contributions during a financial year).
All of these tests have to be met at all times throughout a financial year to be a resident super fund.
The couple couldn’t give the ATO a definite date when they would return to Australia. The best they could do was to specify the month of their homecoming. The Tax Office told the couple that their time away from Australia was imprecise, was longer than two years and as a result their fund’s central management and control of the fund was not in this country and therefore their fund would be deemed to be a non-resident super fund for each year they were away.
Second opinion
The couple recently went back to the Tax Office and said they would return to Australia no later than a particular date. The ATO said their absence from Australia was now a defined period and as a result the fund’s central management and control would remain in Australia.
The ATO had already said the couple would remain residents for their personal income tax affairs. As they are the only members of their fund it only has resident active members.
As all three resident super fund tests were satisfied, the fund would remain a resident super fund during their holiday. Assuming there were no significant regulatory breaches, the fund would remain a complying super fund, which means that their employer could continue to make SG contributions to the fund during their overseas holiday.
The lessons
For me, the primary lesson from this case is that the questions we ask the ATO are as important as the answers.
But this also shows that when asking the ATO for an opinion we need to ensure we understand all the nuances of the law for the area we need advice on so that we know how to provide relevant information.
Before the ATO adjusted their view, the SMSF trustees in our case study were confronting not only a non-resident super fund but also the inability of their related employer to make SG contributions to their super fund. Thankfully for the couple both these issues are now ‘off the table’ because they were able to readjust the information they provided to the ATO.
Important: 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. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report
- Peter Switzer: Investing by numbers – what are the risks? [2]
- Paul Rickard: Bond market ‘Armageddon’ draws nearer [3]
- Penny Pryor: Clearance rates strong in lead up to super Saturday [4]
- Lance Lai: Chart of the week – US S&P500 – Bullish extension in play [5]
- Rudi Filapek-Vandyck: Weekly broker wrap: DJS, MYR and NAB all downgraded [6]