With the continued popularity and growth of the SMSF market what considerations do we need to give to an SMSF who has members based overseas, either for work or travel. The definition of an Australian Superannuation Fund can be a complex issue for SMSFs with members abroad, but must be met if a fund is to retain its complying status.
Traveling and SMSFs - Staying Compliant
- 31 May 2016 -
- 31 May 2016 -
Australian Superannuation Fund
For an SMSF to be entitled to taxation concessions it must meet the definition of an Australian Superannuation Fund. Taxation Ruling TR 2008/09, Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997, provides a great source of information on the residency issues for SMSF’s and expands the definition of what constitutes an Australian Superannuation Fund. It provides further clarity for trustees and advisers on the three tests that need to be addressed to determine whether a SMSF satisfies that definition.
Test 1 – Fund Establishment & Fund Assets
The first test refers to the fund being established in Australia or the assets of the fund being held there. Whilst it is generally accepted that the majority of funds satisfy this test, the ATO have provided further clarity on when a fund is considered established.
To establish a fund a trust deed must be executed. In addition a contribution must be received by the fund as a cash or in-specie contribution, including rollovers. For the purposes of when a fund is established the ATO is only concerned with the timing of the contribution and this must be ‘paid to and accepted by the trustees in Australia’. The execution of the deed does not need to occur in Australia. If a fund satisfies this first test it will satisfy it for all time.
This is an either or test, the second element relates to the investments of the fund and requires that at least one asset of the fund is held in Australia. Again most funds satisfy this requirement.
Test 2 – Central Management and Control
The second test relates to the central management and control of the fund. The Fund must ensure that the central management and control is ordinarily in Australia. The ruling focusses on providing clarity on what constitutes central management and control, who exercises it, when are they doing it and where are they located at the time. It also defines the terms ‘ordinarily’ and ‘temporary absence’.
Central management and control relates to the strategic and high level decision making processes and activities of the fund, such as:
Day to day operational activities of the fund are not considered part of the central management and control as they are regarded as being administrative in nature.
What is meant by central management and control being “ordinarily” in Australia? The ATO have determined that there must be some continuity or permanence about where the management and control is exercised to satisfy the “ordinarily” requirement. The ATO will look at the facts to see if the central management and control is usually, regularly or customarily exercised in Australia.
Two Year Absence – safety net but not the only rule
The legislation states that the central management and control is ordinarily in Australia even if it is temporarily outside Australia for not more than 2 years. This provides a safety net particularly for SMSFs giving them comfort that if their temporary absence is for a period not exceeding two years then they will not fail the test. The Ruling expands the definition of ‘temporarily’ and establishes that the nature, rather than the time, are the main factors when determining whether the absence is indeed temporary. A Fund can still satisfy the test if the duration is defined in advance or is related to the fulfillment of a specific, passing purpose such as an overseas employment contract.
Test 3 – Active Member Test
The active member test is the third test. A fund with no active members need only satisfy the first two tests. Retired members in receipt of a pension who do not intend or have the capability to contribute will satisfy the active member test.
An active member is one who is a contributor to the fund at the particular time or on whose behalf another person has contributed for.
To satisfy the active member test, at least 50% of the assets held by active members must be Australian residents. Alternatively at least 50% of the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members was attributable to members who are Australian residents.
For the purposes of this definition contributions include rollovers.
Overseas Travel – Length of travel and travel intention
As stated above part of the definition of an Australian Superannuation Fund is that the ‘Central Management and Control’ of the Fund is ordinarily in Australia, requiring the high level strategic decisions of a the SMSF be made whilst the Trustees are in Australia or are made whilst the Trustees are temporarily outside of Australia for a period no longer than two years.
An open ended overseas holiday may therefore not satisfy the requirements as the Trustees intention may be to return but the period of absence is not defined in advance.
In the instance of overseas travel it is necessary for the trustees to determine upfront what their intentions are as they may be required to make alternative arrangements prior to their departure.
A Fund with equal trustee representation in Australia and overseas would satisfy the ATO’s requirements that the control of the Fund is in Australia, therefore a mum and dad Fund with two Australian resident children as members and trustees would meet its obligations of being an Australian Superannuation Fund.
A Fund that doesn’t have equal number of trustees in Australia as overseas, or no Australian domiciled trustee will need to look at alternate arrangements. Rather than winding up or converting to Small APRA Fund, an alternative could be for at least 50% of the travelling Trustees to resign and appoint an Australian Resident who holds an enduring power of attorney on their behalf to replace them as Trustee. This appointment would result in the appointed person/s having the same trustee power afforded to the member if they were trustee so the decision to appoint such a person must not be taken lightly.
In the event that the member returns to Australia then they can arrange for the Legal Personal Representative to resign and for the member to be re-appointed. A Corporate Trustee arrangement would make this process less administratively difficult as the Fund would be required to notify ASIC and the ATO of the change in Directors but there would be no need to amend the legal title of the assets held by the Fund as they would remain in the name of the trustees.
Tim Miller is the founder of Miller Super Solutions and has been working in the Superannuation Industry for over 20 years. After a few years honing his research skills in the Superannuation Business Unit of the ATO he spent the next 16 years working closely with SMSF professionals and trustees guiding them on the technicalities and practicalities associated with establishing, running and ultimately closing down SMSFs.
For an SMSF to be entitled to taxation concessions it must meet the definition of an Australian Superannuation Fund. Taxation Ruling TR 2008/09, Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997, provides a great source of information on the residency issues for SMSF’s and expands the definition of what constitutes an Australian Superannuation Fund. It provides further clarity for trustees and advisers on the three tests that need to be addressed to determine whether a SMSF satisfies that definition.
Test 1 – Fund Establishment & Fund Assets
The first test refers to the fund being established in Australia or the assets of the fund being held there. Whilst it is generally accepted that the majority of funds satisfy this test, the ATO have provided further clarity on when a fund is considered established.
To establish a fund a trust deed must be executed. In addition a contribution must be received by the fund as a cash or in-specie contribution, including rollovers. For the purposes of when a fund is established the ATO is only concerned with the timing of the contribution and this must be ‘paid to and accepted by the trustees in Australia’. The execution of the deed does not need to occur in Australia. If a fund satisfies this first test it will satisfy it for all time.
This is an either or test, the second element relates to the investments of the fund and requires that at least one asset of the fund is held in Australia. Again most funds satisfy this requirement.
Test 2 – Central Management and Control
The second test relates to the central management and control of the fund. The Fund must ensure that the central management and control is ordinarily in Australia. The ruling focusses on providing clarity on what constitutes central management and control, who exercises it, when are they doing it and where are they located at the time. It also defines the terms ‘ordinarily’ and ‘temporary absence’.
Central management and control relates to the strategic and high level decision making processes and activities of the fund, such as:
- Formulating the investment strategy for the fund;
- Reviewing, updating or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund’s investments;
- the formulation of a strategy for the prudential management of any reserves, and
- Determining how the assets of the fund are to be used to fund member benefits.
Day to day operational activities of the fund are not considered part of the central management and control as they are regarded as being administrative in nature.
What is meant by central management and control being “ordinarily” in Australia? The ATO have determined that there must be some continuity or permanence about where the management and control is exercised to satisfy the “ordinarily” requirement. The ATO will look at the facts to see if the central management and control is usually, regularly or customarily exercised in Australia.
Two Year Absence – safety net but not the only rule
The legislation states that the central management and control is ordinarily in Australia even if it is temporarily outside Australia for not more than 2 years. This provides a safety net particularly for SMSFs giving them comfort that if their temporary absence is for a period not exceeding two years then they will not fail the test. The Ruling expands the definition of ‘temporarily’ and establishes that the nature, rather than the time, are the main factors when determining whether the absence is indeed temporary. A Fund can still satisfy the test if the duration is defined in advance or is related to the fulfillment of a specific, passing purpose such as an overseas employment contract.
Test 3 – Active Member Test
The active member test is the third test. A fund with no active members need only satisfy the first two tests. Retired members in receipt of a pension who do not intend or have the capability to contribute will satisfy the active member test.
An active member is one who is a contributor to the fund at the particular time or on whose behalf another person has contributed for.
To satisfy the active member test, at least 50% of the assets held by active members must be Australian residents. Alternatively at least 50% of the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members was attributable to members who are Australian residents.
For the purposes of this definition contributions include rollovers.
Overseas Travel – Length of travel and travel intention
As stated above part of the definition of an Australian Superannuation Fund is that the ‘Central Management and Control’ of the Fund is ordinarily in Australia, requiring the high level strategic decisions of a the SMSF be made whilst the Trustees are in Australia or are made whilst the Trustees are temporarily outside of Australia for a period no longer than two years.
An open ended overseas holiday may therefore not satisfy the requirements as the Trustees intention may be to return but the period of absence is not defined in advance.
In the instance of overseas travel it is necessary for the trustees to determine upfront what their intentions are as they may be required to make alternative arrangements prior to their departure.
A Fund with equal trustee representation in Australia and overseas would satisfy the ATO’s requirements that the control of the Fund is in Australia, therefore a mum and dad Fund with two Australian resident children as members and trustees would meet its obligations of being an Australian Superannuation Fund.
A Fund that doesn’t have equal number of trustees in Australia as overseas, or no Australian domiciled trustee will need to look at alternate arrangements. Rather than winding up or converting to Small APRA Fund, an alternative could be for at least 50% of the travelling Trustees to resign and appoint an Australian Resident who holds an enduring power of attorney on their behalf to replace them as Trustee. This appointment would result in the appointed person/s having the same trustee power afforded to the member if they were trustee so the decision to appoint such a person must not be taken lightly.
In the event that the member returns to Australia then they can arrange for the Legal Personal Representative to resign and for the member to be re-appointed. A Corporate Trustee arrangement would make this process less administratively difficult as the Fund would be required to notify ASIC and the ATO of the change in Directors but there would be no need to amend the legal title of the assets held by the Fund as they would remain in the name of the trustees.
Tim Miller is the founder of Miller Super Solutions and has been working in the Superannuation Industry for over 20 years. After a few years honing his research skills in the Superannuation Business Unit of the ATO he spent the next 16 years working closely with SMSF professionals and trustees guiding them on the technicalities and practicalities associated with establishing, running and ultimately closing down SMSFs.
ADDRESSLevel 5, 8-10 Loftus Street, Sydney, 2000
|
Telephone 1300 750 007
|
|
DISCLAIMER
The information provided on this website should not be considered financial or investment advice and is general information intended only for wholesale clients ( as defined in the Corporations Act). If you are not a wholesale client, you should exit the website. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions. Where the website refers to a particular financial product, you should obtain a copy of the relevant product services guide or offer document for wholesale investors before making any decision in relation to the product. Investment returns are not guaranteed as all investments carry some risk. The value of an investment may rise or fall with the changes in the market. Past performance is no guarantee of future performance. This statement relates to any claims made regarding past performance of any Tamim (or associated companies) products. Tamim does not guarantee the accuracy of any information in this website, including information provided by third parties. Information can change without notice and Tamim will endeavour to update this website as soon as practicable after changes. Tamim Funds Management Pty Limited and CTSP Funds Management Pty Ltd trading as Tamim Asset Management and its related entities do not accept responsibility for any inaccuracy or any actions taken in reliance upon this advice. All information provided on this website is correct at the time of writing and is subject to change due to changes in legislation. Please contact Tamim if you wish to confirm the currency of any information on the website.
magellen, kosec, clime, wilson, wam, montgomery, platinum, commsec, caledonia, pengana, tamim
