Question of the month

As international travel resumes, some clients will be departing Australia for work and leisure and there are a number of advice issues and considerations. Leslie and Margaret are the trustees and sole members of their SMSF. Leslie has accepted a two-year contract to work overseas. Margaret will travel with Leslie and they intend to return at the end of the contract in October 2024. What are some of the issues that must be considered in relation to their SMSF? 

Answer: 

When providing advice to members or trustees of an SMSF who are departing Australia, there are a number of things to consider, to ensure that the fund doesn’t become non-complying. Making an SMSF non-complying can have a significant impact to the fund. This includes tax being payable on assessable income of the fund at the top marginal tax rate. 

Some important practical things to consider and discuss include:

• whether the departure is temporary or permanent
• how long the departure is for, and whether there is a pre-defined purpose and length of time before returning to Australia
• whether any members of the fund will remain in Australia, and 
• whether contributions will be made into the SMSF.

There are three tests which must be satisfied for an SMSF to meet the definition of an Australian super fund. The most important tests to consider when overseas travel is to occur, are the:

• central management and control (CMC) test, and
• active member test.

The third test requires that the fund was established in Australia or holds an asset located in Australia. This is generally an easy test to meet.

Leslie and Margaret have declared:

• their absence will be temporary
• they are departing for a defined period and purpose, and
• there is genuine intention to resume residency in Australia.

Below, we look at the CMC and active member tests as they may apply to Leslie and Margaret. 

Central management and control 

To meet this requirement, the CMC of an SMSF must ordinarily be in Australia. Even where the CMC is physically being exercised outside of Australia, the CMC may be considered to be ordinarily inside Australia where the absence is temporary. It cannot be met where the CMC is permanently outside of Australia. 

What is CMC?

The CMC relates to who, when and where the strategic and high-level decisions associated with the fund are made, and certain activities are performed. For example, this generally includes:

• reviewing the performance of the fund’s investments, and making decisions about the investments and investment strategy of the fund, and
• making decisions about member benefits and how assets are to be used for this purpose.

It is important to note, however, that some day-to-day administrative duties, such as paying benefits and accepting contributions, are not generally accepted to be high level strategic decisions for the purpose of CMC.

Temporary absences from Australia

For temporary absences from Australia, the CMC is generally considered to be ordinarily in Australia even where the actual CMC is outside of Australia. A safe harbour condition exists for temporary absences of up to two years. This safe harbour rule also requires that the duration of the absence is established prior to departure, but it is important to understand that this is not an absolute safety net.

Not all absences of less than two years will mean the CMC test is automatically met (eg. where it is unknown at the time of departure how long the absence will be for, or where an absence was intended to be permanent but due to certain circumstances, the trustees return to Australia within two years). 

As Leslie and Margaret’s absence is for a pre-defined period and a specific purpose, with an intention to return to Australia in October 2024, their absence is likely to be accepted to be temporary and CMC will be accepted to be ordinarily in Australia.

Active member test

The ongoing contribution strategy for a client who is a member of an SMSF should be carefully considered prior to an overseas departure. This is because an SMSF may fail the ‘active member’ test for residency purposes, where members who are overseas make or receive contributions to their SMSF.

What is the active member test?

A member of an SMSF is an ‘active member’ at a particular time if he or she is a contributor to the fund or contributions have been made on his or her behalf. To pass the active member test:

• the fund must have no active members, or
• the fund has active members who are Australian residents, and who:

- hold at least 50% of the total market value of the fund’s assets attributable to superannuation interests of all active member accounts, or
- are entitled to at least 50% of the amounts payable to all active members if they voluntarily ceased to be members.

As Leslie and Margaret are the only members of their SMSF and are non resident for Australian tax purposes during their period of absence, if they wish to make super contributions to an Australian fund while overseas, they should make them to a public offer fund to ensure the SMSF meets the active member test. Once they resume Australian residency, they can roll any benefits into their SMSF.

Strategy considerations

To ensure an SMSF continues to meet the definition of an Australian super fund, some strategy options may include:

• using an enduring power of attorney
• converting the SMSF to a Small APRA Fund, or
• rolling interests to a public offer fund.

Proposed changes to the residency rules – Federal Budget

In the 2021/22 Federal Budget, the Government proposed to:

• extend the safe harbor for the CMC test from two to five years, and
• abolish the active member test.

More information

For more information, please read our SMSFs and overseas residency article. It explains the CMC test and active member test in detail, as well as strategies to consider when providing advice to client to ensure the residency requirements are met. The SMSF residency rules are also explored in SMSFR 2008/9.