Julie Hartley
SMSF trustees need to be careful when going away overseas for extended periods as they face many risks including losing residency
These include:
- Failing the Australian residency requirements for the SMSF: these require the SMSF to be established in Australia, the Central Management Control (‘CMC’) to be ordinarily situated in Australia and to pass the active members test.
- The active members test: broadly speaking there must be no or only a minority of overseas members making contributions to the SMSF during the financial year.
- CMC ordinarily in Australia: a majority of the trustees/directors must ordinarily reside in Australia. This test involves looking at where the strategic & important decisions of the trustee/s are taken (i.e. in Australia or overseas).
- The trustee/s’ intention at the time of the departure is an important factor – i.e. at the time of leaving Australia, was the intent to be away temporarily for a period of not more than 2 years? If yes, then they may pass the CMC test, if no, they fail even if they do come back within 2 years.
- If the SMSF is found to be non-complying, its taxable income will be taxed at the highest marginal tax rate for the whole of the financial year.
Plan in advance of travel
Trustee/s should to start planning for the management of their SMSF before leaving Australia for various reasons, including:
- If any documentation such as Enduring Powers of Attorney (EPOAs) have to be signed overseas, stringent rules apply to their execution in order for them to be valid in Australia. It may be very difficult or even impracticable to find an eligible witness.
- Some documents (such as EPOAs) will require that the original document be sent back in hard copy by post to someone in Australia to sign (e.g. the appointed attorney) with the risk of document being lost during international transit.
- Also easier if clients are in the country at the time the strategy is implemented in case documents which are only in the trustee/s’ possession are needed by the adviser/lawyer.
If the trustees know they won’t satisfy the CMC requirements:
If trustees will be unable to satisfy the CMC requirements but want to maintain their SMSF: each departing member will need to execute an enduring power of attorney to appoint one or more attorneys and effect the necessary change of trustees/directors.
It is also recommended to have EPOA anyways in case anything happens to any of the members/trustees while overseas. Plus, check trust deed and constitution of corporate trustee (if applicable) to confirm the appointment of the appointed attorney is permitted.
If the SMSF has a limited recourse borrowing arrangement in place, review terms & conditions of loan to check the change of directors of the corporate trustee will not cause any issues with the bank and whether their prior consent is required.
Also, if the SMSF has individual trustees and owns real estate, it will need to be transferred into the name of the new trustees while the members are overseas – this involves verification of identity checks and execution of a transfer form as well as production of the certificate of title and documentary evidence in relation to the acquisition of the property by the trustees.
As this transfer would need to be undertaken again once the trustees are back acting as trustees in Australia, may be more cost effective to appoint a special purpose company as trustee before departure so only a change in directors is required when the members return. Any real estate would need to be transferred in the name of the new corporate trustee.
As always with major plans, there are other issues to consider:
- The members are handing over control & management of the SMSF to someone else – do they have someone they can trust? Will that person accept the role? Are they eligible?
- The appointed attorney is not acting as an agent of the member, they are appointed in their own right, effectively taking on the responsibilities, duties and liabilities of a trustee/director of a corporate trustee and can be found personally liable for breaches committed while in that office.
- Trustees will generally need to resign from the office of trustee.
- The members may not be able to make contributions during their absence (active members test).
- Are the members’ estate planning strategy and binding death benefit nomination in order?
- Consider setting up an industry or retail fund to contribute to while overseas and then rollover amount into SMSF once back to Australia (rollovers count as contributions for the active member test).
If properly planned, then the only left to do is enjoy the holiday or overseas posting knowing the documentation is in place to protect your superannuation and financial assets.
By Julie Hartley, Associate