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.
He says the definition of an Australian superannuation fund under the Income Tax Assessment Act means SMSF members who continue contributing to their fund while overseas face penalties as well as having it taxed 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 transferring those contributions back to their SMSF on returning to Australia – a costly and cumbersome exercise.
“Aside from the fact it’s not members’ preference, it creates significant additional costs by having an extra superannuation fund and subsequently transferring the benefit to their SMSF. The end result is higher administrative and compliance costs, reducing the superannuation balance.”
Three conditions are required to meet the requirements to be an “Australian Superannuation Fund”; it must be established in Australia; fund management and control is in Australia; and the “active member” test relating to contributions made to the fund by non-resident active members for taxation purposes (they can’t exceed 50 per cent).
Maroney says failure by a fund to meet the definition of an Australian Superannuation Fund means that it is treated as a non-complying fund.
“A complying superannuation fund that becomes non-complying is taxed at 47 per cent on its taxable income for the financial year. It’s also taxed at 47 per cent on the value of the fund’s investments at the start of the financial year when it becomes non-complying, less the amount of any non-deductible contributions.”
Maroney says the operation of these provisions impacts principally on SMSFs as well as small APRA funds as the breach of the active member test is, in effect, restricted to small funds.
“It’s virtually impossible for larger APRA-regulated retail and industry funds to breach the 50 per cent test due to their scale and large membership sizes.”
Maroney says the Association proposes that the “active member” test should be excluded from the requirement for any superannuation fund to 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.”