On 16 January, 2018, the SMSF Association called for the ‘active’ member test to be excluded from the residency requirement for ‘complying’ fund status and all the concessional tax treatment, that goes with that status.
This ‘active member test’ is important in various ways.
- For instance, deductions are only available, for employer contributions, to a ‘complying superannuation contributions‘, under s290-60 & s290-75 of the ITAA97 and likewise for personal contributions under s290-150 & s290-155.
- A ‘complying superannuation fund’, for income tax purposes (under s995-1 of the ITAA97), takes its definition from s42 of the SIS Act (via s45), which includes a requirement that it is a ‘resident regulated superannuation fund’, which, in turn is defined (in s10 of the SIS Act) as being an ‘Australian superannuation fund’ for income tax purposes.
- And ‘Australian superannuation fund’ is defined in s295-95(2)(c) of the ITAA97, to include this ‘active member test‘.
The Association CEO said that legislative restrictions effectively compel Australians who have self-managed super funds (SMSFs) and are temporarily living overseas to switch to an APRA-regulated fund while they are outside the country, says SMSF Association CEO John Maroney.
The CEO says the definition of an ‘Australian superannuation fund’ under s295-95(2) of the Income Tax Assessment Act 1997 (ITAA97) means SMSF members who continue contributing to their fund, while overseas, face penalties the possibility of their fund being taxed at 47% as a non-complying fund.
“The effective consequence for many SMSF members is being forced to switch to an APRA-regulated fund, while overseas, and then transfer those contributions, back to their SMSF, on returning to Australia – which can be a costly and cumbersome exercise.
The ATO’s webpage on ‘Australian Superannuation Funds’ appears below, and gives more detail about this the requirements for a fund to be an ‘Australian superannuation fund’ including this ‘active member test’.
The Active Member test will be satisfied where there are either no members receiving contributions (no ‘active members’) or at least 50% of the funds assets are attributable to members who are Australian residents.
A person does not, automatically, cease to be an Australian resident, just because they go overseas, unless its permanent, or something less than that, if the member establishes a semi-permanent base. It’s this latter way of losing residence, which puts at risk the fund’s capacity to continue to pass the the ‘active member test’, where the relevant member(s) have at least 50% of the fund’s assets. And there is no 2 year deemed residence (compared with the ‘central management and control’ test, where there is a 2 year safe harbour for going overseas).
The CEO says the operation of these provisions impact principally on SMSFs, as well as small APRA funds, as the breach of the active member test is, in effect, restricted to small funds, because most won’t have at least 50% of their funds held by ‘active members’.
Maroney says the Association proposes that the “active member” test should be excluded from the requirement for any superannuation fund to be a ‘resident’ and qualify for taxation concessions under the income tax law.
“Residency of the fund should be determined on the same principles as all other entities for income tax purposes; that is, the place of establishment and the location of the management and control of the entity.
“Removing the ‘active member’ test will ensure that SMSF members who are working overseas can still contribute to their fund where their SMSF balance exceeds 50 per cent of the fund’s assets.
“This will mean that, provided the fund was established in Australia and the central control and management remains in Australia, then an SMSF member can contribute to their fund of choice.”
Study questions (answers* below)
- Is the SMSF Association calling for the ‘active member test’ to be removed from the definition of ‘Australian superannuation fund’?
- Are contributions deductible, whether the fund passes the ‘active member test’ or not?
- Does a contributing member, with 50% or more of the fund’s assets, have to be an Australian resident, to pass the ‘active member’ test?
- Does TR 2009/9 have a definition of ‘Australian superannuation fund’ in it?
- Is the 2 year period (for central management and control being deemed to be only temporarily outside Australia) in s295-95(3)?
*[Answers:1.yes; 2.no(not a complying fund);3.yes;4.yes(para9);no(ss(4)]
ATO webpage on ‘Australian superannuation fund’
Check your fund is an Australian super fund
To be a complying super fund and receive tax concessions, your SMSF needs to be an Australian super fund at all times during the financial year.
If your fund stops being an Australian super fund because it does not satisfy the residency rules, It may become non-complying and its assets (less certain contributions) and its income are taxed at the highest marginal tax rate.
An SMSF is an Australian super fund if it meets all three of these residency conditions.
- The fund was established in Australia, or at least one of its assets is located in Australia.
- The fund was ‘established in Australia’ if the initial contribution to establish the fund was paid and accepted in Australia.
- The central management and control of the fund is ordinarily in Australia.
- This means the SMSF’s strategic decisions are regularly made, and high-level duties and activities are performed, in Australia. It includes formulating the investment strategy of the fund; reviewing the performance of the fund’s investments; formulating a strategy for the prudential management of any reserves; and determining how assets are to be used for member benefits.
- In general, your fund will still meet this requirement even if its central management and control is temporarily outside Australia for up to two years. If central management and control of the fund is permanently outside Australia for any period, it will not meet this requirement.
- The fund either has 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 attributable to super interests, or
- the sum of the amounts that would be payable to active members if they decided to leave the fund.
For the purposes of condition three, a member is an ‘active member’ if they are a contributor to the fund or contributions to the fund have been made on their behalf.
If members are planning to go overseas for an extended period, get professional advice about maintaining the residency status of your SMSF.
If a member of your fund becomes a non-resident but still wishes to make or receive contributions, they should do this outside of their SMSF, for example through a retail or industry super fund. They can then rollover the contributions to their SMSF when they return as an Australian resident.
If your SMSF fails the residency test, you should rollover your funds to a resident regulated super fund and wind up the SMSF. Otherwise we have to make the fund non-complying.