The budget’s overseas residency changes present significant planning opportunities for temporarily overseas SMSF members from 1 July 2022.
SMSFs must pass three residency tests. Failure to pass any one of these results in the fund becoming non-compliant and subject to 45% tax, essentially on its balance. The ATO has no discretion in the matter once residency has been lost so this is a very serious matter. Let’s revisit the three tests.
Establishment Test.
The fund must have been established in Australia or contain an Australian asset. This will not, and should not, change. Unsurprisingly, I have never seen an SMSF that has not satisfied this condition.
Central Management and Control Test.
This condition is regarded as being satisfied, even if more than 50% of the trustees are overseas, if they have the intention of returning to Australia and do so within two years. The budget proposes that the two year period be extended to five. This will be useful as it defers the need to take more complex action to satisfy the test. It must be stressed that, if the trustee’s intention is to leave Australia permanently, even the two year grace period does not apply.
Active Asset Test
It is proposed that this test be abolished. This is quite significant. It is currently necessary for the balances of overseas active members to be equal to, or greater than, the combined balances of all other active members. A member balance becomes active if they are in receipt of a contribution or rollover. Importantly, the two year grace period mentioned in the previous test does not apply. As it is generally difficult for SMSFs to guarantee compliance with this test, overseas members commonly cease making contributions or rollovers to their SMSF and open an account with a public offer fund instead. The public offer fund balance is then rolled into the SMSF once the member returns to Australia. The abolition of the active asset test will simplify the position of overseas Australians and provide planning opportunities for existing arrangements.
