Taking an extended job posting overseas? If you currently have an Australian SMSF, there’s a risk your fund’s “central management and control” (CMC) will be considered to move outside Australia. This causes the SMSF to become non-resident, resulting in hefty penalty taxes, so it’s essential to plan for this before you go. Let’s take a look at why that may happen, and what you can do about it.

SMSF Residency Rules

To meet residency requirements, your SMSF should meet the criteria below:

1. The SMSF was established in Australia, or at least one of the SMSF’s assets must be located in Australia.
2. The central management and control of the SMSF is ordinarily undertaken in Australia.
3. At least 50% of the SMSF Membership must be in Australia, measured by market value (known as the Active Member test).

There is also what’s known as the “two-year” rule. This mainly applies to the third criteria and active member test, as it helps determine whether the SMSF trustees (members) are based in Australia.

The two-year rule says that central management of an SMSF can be considered ‘in Australia’ even if members are overseas, but only if temporarily and for a period of less than two years. Of course, there are exceptions to this rule. A move can be considered permanent even if you are outside of Australia for less than two years, depending on the circumstances. And vice-versa, being outside of Australia may be acceptable in times of unforeseen circumstances or clear intention to return.

SMSFs that breach residency rules are taxed at 45%, the highest marginal tax rate, which obviously isn’t an ideal situation. If this sounds like your situation, here are some solutions to consider.

Option 1: Appoint an attorney

Usually, every SMSF member must be a trustee (or director of its corporate trustee). However, an SMSF member travelling overseas can avoid CMC problems by appointing a trusted Australian-based person to act as trustee (or director) for them, provided that person holds the member’s enduring power of attorney.

However, the SMSF member must resign as a trustee (or director) and be prepared to effectively hand over control to their attorney.

You’ll also need to comply with the separate “active member” test, which requires that while the SMSF is receiving any contributions, at least 50% of the fund’s total asset value attributable to actively contributing members is attributable to resident contributing members. So, you may need to stop SMSF contributions entirely while overseas. Making contributions into a separate public offer fund could be a solution.

Option 2: Wind up your SMSF

You might consider rolling your super over to a public offer fund and winding up the SMSF. This option closes the SMSF but deals with the CMC issue (as control lies with the professional Australian trustee), and you can make contributions into the large fund without worrying about the “active member” test.

However, you’ll need to dispose of the SMSF’s assets first and this may trigger capital gains tax (CGT) liabilities. These disposals will be partly or even fully CGT exempt if the fund is paying retirement phase pensions, so talk to your adviser about the expected CGT bill in this case.

Option 3: Convert to a small APRA fund

Like SMSFs, “small APRA funds” (SAFs) have a maximum of four members but they are run by a professional licensed trustee, rather than by members. Although this may be expensive, it takes care of any CMC worries, and on conversion the fund won’t incur any CGT liabilities because the assets remain in the fund.

The downside is you’ll also need to comply with the “active member test” so, as in Option 1, you may need to stop all contributions into the SAF.

Option 4: Do nothing

While not ideal, it is possible to move overseas and keep your SMSF as is. You do riskthe higher tax rate, as you still have to meet Australian residency requirements, and you will still need to comply with Australian superannuation laws to access your funds when the time comes.

And while there may be less work involved overall, this upside generally isn’t worth it. Of course, you can always talk to a financial adviser, and they will be able to provide you with the guidance necessary to achieve the best possible outcome for your financial future.

Speak to an Expert Today

If you’re moving overseas, the team at Focus Partners Australia can help you get your financial affairs in order. We offer a wide range of SMSF services, including SMSF audits, SMSF setup, SMSF residency tests, and more. Contact us today to start exploring your Australian SMSF options to protect your super against residency issues.