There have been many articles written about how a Self Managed Superannuation Fund (SMSF) can maintain its residency status when the members of the SMSF go overseas.
It occurs to me that perhaps not many SMSF trustees and professionals are aware of the tax implications of going overseas and coming back to Australia.
You see, for an SMSF to maintain its complying status and receive concessional tax treatment, the SMSF must be a resident regulated superannuation fund at all times throughout the financial year. I have explained in the past on how to meet the residency status and have summarised the three (3) tests that need to be met below:
- The SMSF must be established in Australia or have any of its assets situated in Australia. This test is easy to meet if the initial contribution made to the SMSF is received in the SMSF’s bank account in Australia. This test is also met, if at least one of the assets of the SMSF is situated in Australia.
- The central management and control of the SMSF must ordinarily be in Australia. This test will be satisfied if the person who makes the high level decisions for the SMSF is in Australia. If this person is overseas, as long as the period of absence is temporary it will satisfy this test. If this person goes overseas for an indefinite period, then the SMSF will fail this test.
- The SMSF does not have any active members, or at least fifty per cent of the benefits in the SMSF belong to active resident members. An active member is a member who contributes to their SMSF or who has another person (e.g. employer) making contributions for them on their behalf. So if SMSF members go overseas, it is best they do not make any contributions.
One thing you may not be aware of is that once an SMSF fails the residency test it becomes a non-complying superannuation fund. If an SMSF changes it status from a complying SMSF to a non-complying SMSF, then all of its assets accumulated over the years of its existence; minus any member’s contributions received by the SMSF where no deduction has been claimed; plus earnings on investments received in the financial year that the SMSF becomes a non-complying SMSF is taxed at the flat rate of 45 per cent. Then each year the SMSF remains a non-resident (non-complying) SMSF the income will be taxed at flat 45 per cent.
Another thing that people are not aware of is what happens when the SMSF members return to Australia and their SMSF changes it status from a non-resident SMSF back to a resident SMSF.
When an SMSF status changes from a non-resident to a resident, the above formula takes effect again and all of the SMSF’s assets minus any members’ contributions received in the non-resident SMSF are included in the assessable income of the SMSF in the year it become a resident SMSF and taxed at either 45 per cent (if the SMSF returns to Australia during the financial year) or 15 per cent (if the SMSF returns to Australia for the full financial year). Then each year the SMSF remains a resident (complying) SMSF it will receive the concessional tax treatment of 15 per cent.
If SMSF clients don’t seek advice on their SMSF before they depart it can be quite detrimental to their life savings if they go overseas and later return to Australia. They could end up paying 90% tax in total on their SMSF’s accumulated assets which is not the kind of surprise anyone wants to return home to.