The consequences of an SMSF failing the residency rules can be automatic non-complying status. This will broadly mean the entire amount of the SMSF’s assets, less non-concessional contributions, are taxed at 45% in the year of non-compliance (47% during temporary budget repair levy financial years of 2014-15, 2015-16 and 2016-17). The result of this is to effectively strip the fund of tax concessions it would have had over the years. For every later year of non-compliance, the income tax rate of the fund is 45%.
DBA Lawyers offers an SMSF residency kit that arms trustees or advisers with information and strategies to assist SMSFs to satisfy the residency tests, which are more technically known as the Australian superannuation fund definition.
- a detailed explanation of the issues and operation of law
- what should be done to plan for residency issues
- practical tips and examples
- template trustee resolutions
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An SMSF only qualifies as an Australian superannuation fund if it meets all of three conditions, briefly summarised below.
The fund must have been established in Australia.
The central management and control of the fund must ordinarily be in Australia.
- the fund must have no active members, or
- it has active members who are Australian residents and who hold at least 50% of:
- the total market value of the fund’s assets, or
- the amounts that would be payable to active members if they voluntarily left the fund.
An active member means a member who is a contributor to the fund at the time, or a person on whose behalf contributions are being made.
The ATO have active data matching via personal and SMSF tax returns, as well as filtering a range of other data from entries to and exits from Australia. Unless an SMSF is properly positioned with appropriate documents and procedures, there is a risk of things going wrong, giving rise to a hefty tax assessment and potential penalties. With the arrival of the global village and family members being spread across countries, trustees should be proactive. For example, it may be that on succession to the trustee, the SMSF falls into troubled waters when overseas children take over.
Lastly, recent cases and ATO materials appear to heighten the risk in this area. The decision of Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation  HCA 45; 2016 ATC 20-589 (‘Bywater’) and ATO comments in TR 2018/9 indicate that mere figurehead directors will not be sufficient to establish central management and control. In this case, the central management and control may well be found overseas with those who have tacit control.
In Bywater, the director controller in Sydney was held to control a number of overseas companies.
Thus, to minimise risks with SMSFs failing the residency tests, there is more needed than simply having a resident director who is appointed in place of the overseas member.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
4 March 2020