Tax traps for travelling SMSF members

If you’re planning on some extended overseas travel, there are some critical tax considerations to ensure you don’t lose your right to concessions and complying status, particularly for single-member SMSFs.

The basics

Being treated as an Australian superannuation fund is the essential requirement for your SMSF to receive all the superannuation tax concessions. This includes concessions on contributions, the fund’s investment income and on lump sums and pensions. If your SMSF does not qualify as an Australian superannuation fund, that’s bad news, as it’ll be taxed as a non-complying fund.

There are three tests to be met for your SMSF fund to qualify as an Australian super fund. These are the establishment test, the central management and control test and the active member test. I’m sure that if you are in Australia as the single member of your SMSF then you will probably meet all these tests. However, if you move overseas even for a short period, there are things to watch out for – and I’m sure you don’t want to lose those concessions for your SMSF.

The tests are that your SMSF:

• was established in Australia,
• its central management and control are in Australia,
• meets the active member test if contributions are made to the fund.

Established in Australia

It should be relatively easy to work out if your SMSF has been established in Australia. This is usually where the fund’s trust deed was executed. If it was signed and witnessed in Australia, then your SMSF will have been established in Australia. You may find that there may be a reference in the deed about which state laws apply to the fund, although this is not essential.

Central management and control

Where the trustee ‘resides’ is important to help your fund qualify as an Australian super fund. The central management and control have to do with where the important decisions of the fund are made. It is technically determined by the location and timing of strategic and high-level decisions of the fund. Any administrative duties undertaken in running the fund are not considered to be strategic and high level. However, decisions about your SMSF’s investment strategy are related to central management and control of your SMSF.

Single member SMSFs

If the trustees of your SMSF, which includes you of course, leave Australia temporarily for up to two years your SMSF can retain its status as an Australian superannuation fund. This allows you to make strategic decisions about your fund while you are overseas and decisions about the fund’s central management and control are treated as being made in Australia.

With a single member SMSF you are required to have a second individual trustee, but they are not required to be a fund member. And if your SMSF’s trustee is a company there is a choice of having a second director who may not be a member. Providing one trustee remains in Australia and has the power to make strategic decisions about your SMSF, then the central management and control will remain in Australia.

Example one

You have decided to go on an extended holiday overseas but are not sure when you will be back. It could be one year but may be longer depending on what happens. Your daughter is the second trustee of your superannuation fund but is not a member. The fund’s trust deed gives her the power to make decisions about the fund and will remain in Australia for the foreseeable future. In this situation as your daughter can make strategic decisions about the fund the central management and control will remain in Australia.

Example two

You and your partner are directors of your SMSF’s corporate trustee; however, your partner is not a member of the fund. You’ve both decided to trek off overseas for an extended holiday of about 12 months. As you and your partner will be overseas temporarily for less than two years, any decisions about your SMSF can be made overseas and the central management and control will be treated as being in Australia.

If you think that overseas absence may make it difficult to make decisions about your SMSF because of communication issues, then there are some alternative issues that are available. The first is that the trustees grant an enduring power of attorney to someone who will remain in Australia and the other is, in the case of a corporate trustee, to appoint an alternate director of the trustee company.

If your SMSF’s trust deed permits, you may grant an enduring power of attorney to someone who remains in Australia during the absence of the trustees. The person may be a trusted family member, relative or friend. In this situation you are required to resign as trustee of the fund and the person holding the enduring power of attorney will be appointed as trustee in your place.

The second option if the trustee of your SMSF is a company is to nominate your legal personal representative as an alternate director. The alternate director is able to make decisions on behalf of the company if the relevant director is not available, for example, if you are overseas and uncontactable. It’s a simple matter or making sure there is nothing in the company constitution or your SMSF’s trust deed to prevent an alternate director being appointed and making decisions. If that’s the case, then ASIC is notified of the alternate director and it is recognised in the fund minutes.

Active member test

The third test is the active member test which can restrict you making contributions to the fund when you are overseas and do not qualify as an Australian tax resident. You need to be very careful if you are thinking of making contributions to the fund in this situation as making the contribution at the wrong time can lead to a fund being treated as non-complying and taxed at 45%.

You will be an ‘active member’ of your SMSF if you make contributions to your SMSF. If you are a non-resident for Australian tax purposes and the balances of all other non-residents is greater than 50% of all other active member’s balances the fund will be treated as a non-complying fund. How this works can be illustrated in the following example.

Example three

You are the member of an SMSF which has two members. As you have been overseas for a while you do not qualify as a resident for Australian tax purposes, but the other member is an Australian tax resident. Your balance in the fund is $1 million and the other member’s balance is $1.2 million.

If you contribute to the SMSF, irrespective of the amount involved, but the other member makes no contribution you will be the only active member. Your balance in the fund will be used to determine whether the active member test is breached. Only your balance will be taken into account for the active member test calculation.

The result will be that 100% of the active member’s balance will relate to a non-resident for tax purposes. Therefore the active member test will be breached as it is greater than the 50% threshold mentioned above.

However, if both fund members contributed to the fund the active member test would be satisfied. This is because the proportion of the member balances that relate to non-residents for Australian tax purposes will be less than 50% of the total balance of all active members. The calculation will include your balance of $1 million and the other member’s balance of $1.2 million. As the proportion of your balance in the fund is less than 50% of the total of all active member’s balances you can make the contribution without endangering the fund’s compliance status.

Single member funds and the Active Member Test

The issue with single member SMSFs is that if you become a non-resident for Australian tax purposes and you contribute to the fund then the fund will be treated as a non-complying fund. There is no discretion in the tax legislation that provides the ATO with a discretion to overlook the breach. The lesson is that if you are in this position that you should not contribute to your SMSF, but you may be able to contribute to an APRA fund.

Should I go overseas?

Of course you should, don’t let the superannuation rules interfere with that decision. But if you do, make sure your SMSF is still able to operate while you are overseas so it can qualify for those highly valued tax concessions.