New super residency rules level the playing field for SMSF expats

First published in the Financial Review on 16 June 2021

How overseas trustees of DIY super funds will benefit from the government decision to allow them to continue managing their fund for up to five years, rather than two.
Self-managed super fund trustees, who make a conscious decision to actively manage their retirement savings, have been at a significant disadvantage compared with large APRA-regulated funds if they were temporary residents overseas, either for work or study.

This iniquitous situation was finally resolved in this year’s federal budget when the government signalled a shift in the goalposts by allowing SMSFs with temporarily absent trustees to further manage their funds for up to five years, instead of two years, without failing the central management and control test. It is expected to apply from July 1, 2022.

Two years was clearly too short in the context of modern work arrangements where executives and other staff are often expected to commit to an overseas placement for longer periods. Even if the initial contract is for a one- or two-year overseas assignment, it’s not uncommon for these contracts to be extended.

As a consequence, SMSF trustees who were temporary residents overseas for more than two years often needed to take evasive action to avoid their fund being taxed as a non-complying superannuation fund. This often meant appointing enduring powers of attorney, adding extra trustees who also needed to be members of the fund, converting their SMSF to a small APRA fund or winding up their SMSF.

In a further concession announced in this year’s federal budget, the active member test will also be abolished. This test has long been a thorn in the side of SMSF members working overseas as it prevents rollovers and contributions being made to the fund for a non-resident member if their share of the fund balance exceeds 50 per cent of the balance of all active fund members.

For many SMSF members wishing to continue contributing to superannuation while working or studying overseas, it meant they had to establish an account with an APRA-regulated fund and, on returning to Australia, roll over those contributions to their SMSF.

It was a cumbersome process that forced SMSFs to make contributions to a fund that was not their preferred choice. It also caused significant additional costs to be incurred by having an extra superannuation fund and subsequently having to transfer the benefit back to their SMSF, increasing fund administration and compliance costs and reducing their superannuation balance – a factor the Productivity Commission highlighted in its 2018 report.

A breach of the active member test, just like a breach in the central management and control test, means the SMSF has failed to meet the definition of an “Australian superannuation fund” resulting in the fund being taxed as a non-complying superannuation fund.

The financial consequences of being taxed as a non-complying fund are significant. With non-compliance comes a 45 per cent rate on taxable income as well as 45 per cent on the value of investments at the start of the financial year it becomes non-complying, less the amount of any non-deductible contributions (non-concessional contributions).

The thinking behind the active member test was never convincing. How could it provide additional integrity to superannuation when the establishment, control and management tests already ensure only Australian-based superannuation funds can benefit from the system’s tax concessions.

Instead, this test became an unnecessary source of red tape, especially for SMSFs and small APRA funds, adding costs and reducing the efficiency of the superannuation system, as many a financial adviser can attest.

What was required was the removal of this test and for a fund’s residency to 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, ensuring that SMSF members working overseas could still contribute to their fund where their fund balance exceeds 50 per cent of the fund’s assets attributable to active fund members.

The removal of this test means that if the fund was established in Australia and the central management and control ordinarily remains in Australia, an SMSF member can continue to contribute to a fund of their choice.

The benefits for SMSF members will be quite tangible as they will still be able to make contributions to their chosen fund to save for their retirement, as well as reducing red tape and compliance issues while not compromising the integrity of the superannuation or tax systems. The federal government has achieved the latter by extending the timeframe to five years.

The timeliness of this measure has been highlighted by yet another unintended consequence of the COVID-19 pandemic – SMSF members who have found themselves stranded overseas through no fault of their own because of this pernicious virus.

The ATO has already issued temporary relief to individual SMSF trustees or directors of its corporate trustee if they find themselves stranded overseas because of COVID-19. This has been successfully introduced as a practical application of SMSF residency rules without any negative outcomes.


Opinion piece written by
John Maroney, 
SMSF Association