You are excited. You have just been offered a position working offshore and are looking forward to new opportunities, learning a new culture and living in a new location. You are at a barbeque with friends one weekend and someone mentions that you have might have problems with moving offshore if you have a Self Managed Superannuation Fund (SMSF). You haven’t thought about this before so what are the issues ?
The first issue to consider is whether you will a resident for tax purposes or a non resident for tax purposes.
There are four key tests for determining the residency status of an individual
- Residence according to ordinary concepts
- Domicile test
- 183 days test
- Superannuation test
It is extremely important you work with your adviser to determine your residency status and how this will impact on you if you have an SMSF.
To be a complying fund, a superannuation fund must be an “Australian superannuation fund”. In other words, unless a fund meets the definition in the tax legislation, the fund and its members will not enjoy any of the concessional tax treatment that applies to superannuation in Australia.
The ATO’s view on when a SMSF will be an Australian superannuation fund is discussed in TR2008/9. The legislation sets out 3 tests and the fund must meet all of them to remain complying. The ATO notes that, although the fund may satisfy the conditions at any time during the year to be an Australian superannuation fund for the whole year, it must pass all three tests at all times to be a complying fund.
So what are the tests ?
- Establishment and Australian Assets
- Central Management and Control
- Active Member test
Establishment and Australian Assets
There is a once off establishment test that can be met if the fund was first invested with assets in Australia. The execution of the fund deed in Australia is not critical. Although both execution of the trust deed and the initial investment are required to establish the fund this does not mean that both of these
activities must occur within Australia.
Alternatively, the fund needs at least one asset in Australia. In practical terms, the fund simply needs to have a bank account opened here.
Central Management and Control
The central management and control must ordinarily be exercised in Australia. This is extremely important for expats going offshore. The ATO focuses on the “strategic and high level decision making processes and activities” of the fund as opposed to the mere day to day administration.
We recommend discussing these issues with your adviser to ensure that you meet this test. This is a complex area which outgoing expats need to carefully consider and plan for.
Active Member Test
The final condition to be an Australian superannuation fund is the “active member test”. To be an active member, the member must be contributing to the fund – albeit it may only be occasionally or sporadically.
The active member test is satisfied if:
- There are no active members or
- 50% or more of the market value of assets attributable to active members is attributable to active resident members or
- 50% or more of the amounts payable on voluntary exit to active members is attributable to active resident members.
What happens if I get it wrong ?
Unless a fund meets the definition of “Australian superannuation fund” in the tax legislation, the fund and its members will not enjoy any of the concessional tax treatment that applies to superannuation in Australia. Worse still, an existing SMSF that ceases to be complying will have to include in its assessable income:
- the market value of its assets,
- less the amount of the tax free component that came from pre-1983 component and post-June 2007 and untaxed contributions
in the year it becomes non-complying and,in following tax years, will also be taxed on its income at the top marginal tax rate.
This could mean losing almost half of the SMSF assets to tax !!! Not a great result.
If you are an expat going offshore and have an SMSF give Omega Partners Accountants in Sydney a call on (02) 8006 4298 to discuss structuring your affairs for your SMSF prior to your departure.