Getting a posting overseas can be exciting news but the excitement might soon fizzle out and turn into a financial nightmare if you don’t take measures to tie up the loose ends with regards to your self-managed superannuation fund (SMSF).
The greatest risk will be falling afoul of the stringent residency rules. An SMSF trustee must ensure that the fund remains an Australian SMSF otherwise it could be taxed at the top marginal tax rate of 45% instead of at a concessionary rate of 15% that applies to all SMSFs.
When running your self-managed superannuation fund and getting a posting overseas at the same time, it is important to sit down with your financial advisor or accountant and plan accordingly on what will happen to your SMSF for the period that you will be away. Failing to do so may see the ATO subject you to a whopping tax bill for non-compliance.
“Non-Complying” Super Fund
A non-complying super fund is subjected to taxes at the top marginal rate of 45% of its market value at the beginning of the year in which the fund becomes “non-complying”. The 45% tax is also applied on its investment income as well as on its concessional contributions.
If your SMSF is non-compliant, you will face a punitive 45% tax on the fund’s market value because the fund will no longer be controlled from Australia. Assuming you have $1 million in your super fund and no non-concessional contributions are made into the fund and your fund grows 5% or $50,000 in the first year, your super fund will be taxed at the top marginal tax rate. So instead of a tax of $7500 (15% of $50,000), you could pay a tax of $472, 500 on the super fund market value and earnings. That is 45% of $1 million plus 45% of your super fund earnings of $50,000. That will wipe out almost 50% of your savings in your superannuation!
Ensuring Your Super Fund is in Compliance
To get the tax concessions and avoid your super fund being classified as “non-complying”, you will have to meet certain requirements. These include the following:-
- Fund must be established in Australia: The SMSF must have been established in Australia or must have an asset that is based in Australia at time of review.
- The control and central management of the superfund must ordinarily be in Australia. The control and central management of the super fund refers to the high-level decision-making processes of the fund.
- Active Member Test: A member can only contribute to the fund if at least 50% of the super fund’s total market value is held by contributing members (active members) residing in Australia.
If your super fund does not meet these requirements, the Australian Taxation Office will consider the fund as “non-complying”. This will subject the fund to the highest marginal tax rate for the entire financial year that you fail to comply.
The Two-Year Rule
The length of time during which you plan to be away overseas is also key in determining whether your fund is non-complying. The central management and the control of an SMSF is treated as being ordinarily in Australia even if it has been temporarily out of Australia for not more than 2 years.
However, the two year rule has certain exceptions. It is not absolute. The two year rule is generally applied in consideration of the facts, intentions and circumstances of the absence. If an SMSF trustee departed Australia with the intention of being away indefinitely, then the two-year rule will not apply even if the trustee returns to Australia in less than two years.
There are also circumstances where an absence of more than two years may be exempted. For example, if an SMSF Trustee departed Australia with the intention of coming back in less than two years but due to unavoidable/unforeseen circumstances, was forced to stay overseas for much longer , they may be exempted from the two-year rule. In such a situation, the Australian Taxation Office would be satisfied if another requirement such as the central management and control of the SMSF being in Australia is met.
Power of Attorney
If you will be heading overseas on a permanent basis, it is possible to be still part of your SMSF proceedings by taking the Power of Attorney over the control and management of your super fund. However, members will not be allowed to contribute to the fund while overseas.
The Question of Control in Australia
There is a requirement that at least 50% of the trustees that are involved in the management and the control of a super fund must be resident and also be based in Australia. The key figure in the fund that will be formulating the investment strategy, monitoring the fund performance and making decisions on how the fund assets will be used to fund the member benefits must be based in Australia. If you feel you might fail this requirement and be subjected to exorbitant taxes, you can also go for the following options to be on the safe side:-
- Simply wind off the superannuation fund and do a transfer to a public offer fund.
- Appoint other trustees or members to the fund. For example, if you expect to spend a considerable amount of time overseas, you can appoint your spouse or adult kids as members or trustees to the super fund.
- Alternatively, you can also appoint an enduring Power of Attorney to act as a super fund trustee on your behalf while you are away. This should be done while you are still in Australia in order to avoid further legal complications.
- Where you have a corporate trustee, you can also appoint an alternative director who will act as a trustee director while you are away.
- Finally, you can also choose to convert your SMSF into an ARPA fund. You can do this by tendering your resignation from the trustee and then appointing a professional trustee to manage the fund.
Keep in mind that an overseas member cannot make a contribution to a superannuation fund so the active members rule must be met: 50% of the total market value of the fund must be held by “active members”. Any fund member who makes contributions or rollovers is considered an active member. However, there are ways in which you can still make contributions while overseas which you can subsequently transfer to your SMSF once you return to Australia.
Going overseas and need help with planning your SMSF for the duration you will be away? Talk to a professional accounting firm Melbourne practice to assist in you in getting a grasp of your options.