The Government announced that it will relax residency requirements for self-managed superannuation funds (SMSFs) by extending the central control and management test safe harbour from 2 to 5 years. Another planned change related to SMSFs is the removal of the active member test. These 2021 federal budget measures are expected to have effect from 1 July 2022, subject to the passing of legislation.
The proposed changes will allow SMSF and small fund members to continue to contribute to their funds while temporarily overseas. This will make contribution rules the same for overseas members of small and large funds, such as Australian Prudential Regulation Authority (APRA) regulated funds. SMSF members can retain the flexibility to keep and contribute to their preferred fund while experiencing overseas work and education opportunities.
Complying superannuation funds
Funds that are complying super funds are eligible for concessional tax treatment. If a fund stops being an Australian super fund because it does not satisfy the residency rules, it may become non-complying. Its assets (less certain contributions) and its income are then taxed at the highest marginal tax rate. Unless the fund can retain its complying status, the funds should be rolled over to a resident regulated super fund and the non-complying fund wound up.
To meet the current definition of a complying fund, a fund must pass 3 residency tests, one being that the central management and control of the fund is ordinarily in Australia (TR 2008/9).
Central management and control test
The central management and control (CM&C) of a superannuation fund depends on the who, when and where of the strategic decision-making processes and activities of the fund.
The strategic and high-level decision-making processes of a super fund include:
formulating the investment strategy for the fund
reviewing and updating or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund’s investments, and
determining how the assets of the fund are to be used to fund member benefits.
Activities to do with the daily operation or administration of the fund do not constitute CM&C as they are not strategic in nature.
The “who” exercising the CM&C is determined based on who actually performs the high-level duties in relation to the fund. It is not sufficient that they have the legal responsibility to do so. There may be situations where a person other than the fund trustee is exercising the CM&C of the fund, for example, the trustee may have delegated their duties and powers to another person.
The “where” of the CM&C is determined by where the key strategic decisions of the fund are made, and the high-level duties are performed, regardless of the residency of the person/s exercising CM&C.
The “when” a CM&C of a fund is ordinarily in Australia is determined by whether in the ordinary course of events, the CM&C of the fund is regularly, usually and customarily exercised in Australia. If the CM&C of the fund is being temporarily exercised outside Australia, this will not prevent the CM&C of the fund being “ordinarily” in Australia at a particular time.
Temporary absences from Australia
The subject of the proposed change is the length of time that the CM&C of a super fund is still considered ordinarily in Australia despite being temporarily outside of Australia. The CM&C of a fund will be “temporarily” outside Australia if the person or persons who exercise the CM&C of the fund are outside Australia for a relatively short period of time and during that time they exercise the CM&C of the fund overseas.
While the CM&C of a fund can be outside Australia for a period greater than the current test period of 2 years, the absence must be temporary in nature. Conversely, it will not be considered “ordinarily” in Australia at a time even if the period of absence is less than the test period if the CM&C of the fund is deemed not temporarily outside Australia. This is determined based on the facts and circumstances of the fund and cannot be established in retrospect.
Active member test
One of the other current residency tests is the “active member” test, where to satisfy the test, a fund:
has no active members, or
it has active members who are Australian residents and who hold at least 50% of either: – the total market value of the fund’s assets attributable to super interests, or – the sum of the amounts that would be payable to active members if they decided to leave the fund.
For the purposes of this test, a fund member is an “active member” if they are a contributor to the fund or contributions to the fund have been made on their behalf. This means that if their share of the fund balance exceeds 50% of the balance of all active fund members, a fund’s members would either have to stop making contributions to the fund while overseas, or make super contributions into an APRA-regulated fund.
The removal of the active member test will be beneficial for SMSFs and smaller super funds, as they are more often impacted by this test than funds with larger membership. It will reduce the need of SMSF members being forced to open a new account with or roll over super into APRA-regulated funds while overseas, only to transfer their contributions back to an SMSF on return — preventing an unnecessary and costly compliance burden.
Also, it will provide an opportunity for family members added to an SMSF to take over the high-level decision making of the fund to be able to make contributions and become active members in their own right.
ATO COVID-19 considerations for SMSF residency
The Australian Taxation Office has recently stated considerations if the individual trustees of an SMSF or directors of its corporate trustee are stranded overseas due to COVID-19 international travel restrictions. In the absence of any other changes in the SMSF or the trustees’ circumstances affecting the other conditions, the ATO does not intend to use compliance resources to determine whether the SMSF meets the relevant residency conditions
