By Kymberlee Naumann

As the world becomes more and more global, SMSF trustees are continually being faced with matters of an international flavour. Many industries are also becoming increasingly global, most moving towards a global workforce. This has led to a rise in the number of Australians who are based overseas. The relocation of staff can play havoc with those that have a self managed superannuation fund (SMSF).

Let’s first look at the potential residency issues affecting SMSFs. A complying SMSF must be an Australian superannuation fund under Section 292-95(2) of the Income Tax Assessment Act 1997. An Australian superannuation fund must satisfy two criteria:

• The central management and control of the fund must ordinarily be in Australia; and
• The majority of the fund’s account balances must be maintained for Australian resident members (meeting the active member test, discussed below).

Central management and control The tax commissioner has stated that the central management and control of a superannuation fund ‘…involves a focus on the who, when and where of the strategic and high-level decision making processes and activities of the fund’. Such high-level decision making processes may include formulating, reviewing and carrying the fund’s investment strategy, monitoring the performance of fund investments and determining how fund assets are to be used to fund member benefits. The commissioner is of the view that the day-to-day operations of the fund’s activities will not necessarily constitute central management and control.

It is important to note that section 295-95(4) expressly states that the central management and control of a fund will be considered ordinarily in Australia even if it is temporarily outside Australia for a period of not more than two years. This allows SMSF members to be overseas temporarily for a period not exceeding two years and not jeopardise the fund’s complying status. If, however, a member departs overseas for an indefinite stay, the ATO may consider they departed permanently and the fund will be considered to have failed the Australian superannuation fund test at the time of departure. Thus, the two-year window is only intended to cover temporary departures.

Active member rules Assuming the central management and control test is satisfied, the second key test to satisfy is the active member test, which broadly requires that at least 50 per cent of fund account balances are to be held for resident active members. An active member is a member in respect of whom contributions or rollovers are made to the fund. If no contributions or rollovers are made in respect of members during their overseas stay, then this rule is not invoked. This, if no contributions and rollovers are made while the members are overseas, the central management and control test is the main test to satisfy.

Strategies to manage central management and control The most common strategy for SMSF members heading overseas for more than two years, or even for an indefinite period, is to hand over control of their SMSF to one or more trusted people. This handover is done via executing an enduring power of attorney in favour of each ‘trusted’ person. The member then resigns as an SMSF trustee or director of the corporate trustee and the nominated attorney is appointed as trustee or director in their place. The nominated attorneys who stand in as the replacement trustees or directors must then undertake the SMSF’s strategic decisions.

If an attorney is to stand in as a replacement trustee, it is important that this person does not merely act as a puppet of the members but instead, exercises his/her decisions and takes responsibility for the strategic direction of the fund. If it is found that the members still control the strategic decision making from overseas, despite having a replacement trustee in place, the fund’s central management and control may not be considered as being in Australia and the fund could be rendered non-complying.

In conclusion, in today’s increasingly global environment, it is important for both SMSF trustees and their advisers to be aware of the issues that may be faced with international matters. All need to be aware of the criteria to be met to continue to be considered an Australian superannuation fund, and the issues that may arise if these tests have the potential to be jeopardised.

If you have any queries regarding residency issues of your fund, please do not hesitate to contact our office.