Are you a travel aficionado? Nothing unlawful about that, except there may be negative consequences if you are a trustee in a self managed superannuation fund (SMSF).
If a trustee relocates overseas for an extended period, the residency status of an SMSF, its compliance and its ability to receive tax concessions may be affected. Trustees will need to put strategies in place to avoid their SMSFs becoming non-compliant and losing their concessional tax rates (non-compliant funds are taxed at the highest marginal tax rate of 46.5%).
The two issues below often arise when a trustee in an SMSF relocates overseas for an extended period of time.
Issue 1: Central management; local control
If high-level decisions – such as the formulation of an SMSF’s investment strategy or how assets are used to fund member benefits – are made outside Australia, trustees need to show that central management and control of their SMSF are ‘ordinarily’ in Australia and only temporarily overseas.
In general, an SMSF will still meet the ‘ordinarily’ requirements if its central management and control is temporarily outside Australia for up to two years.
In the event that the ‘ordinarily’ requirement cannot be satisfied, consider the following options:
- appoint a legal personal representative with an enduring power of attorney (could be one of your adult children for instance) to be trustee in place of you. They will have the same power as a trustee, they will make key decisions, take responsibility and can override your wishes as you cannot be seen to be making high-level decisions. If you are involved in high-level decision-making from overseas, central management and control has remained with you and will constitute a breach of the rules. The Tax Office can monitor email trails to ascertain if this has happened
- wind up the fund and roll benefits over into a retail/industry fund, and
- convert the SMSF into a small APRA fund.
Administrative duties are also imposed on trustees so although you are overseas, you may still find yourself needing to sign financial statements, for instance. An SMSF with up to two members needs to get all trustees to sign documents and an SMSF with more than two members must have at least two signatures.
Dodgy tax scheme warning
The Tax Office is warning us to steer clear of tax avoidance schemes, especially in the lead up to 2012 tax return time. Tax Commissioner Michael D’Ascenzo says there’s a marked increase in the number of schemes being promoted at this time of year. ‘Modern tax schemes can be very sophisticated and may masquerade as complex investments or other arrangements that can appeal even to experienced investors.’
These schemes can come with the promise of ‘wealth creation’ or financial security, exploit one’s social or environmental conscience by promising large up-front deductions for donations to charity or ‘green initiatives’. Many are marketed with the stamp of approval from so-called ‘experts’, however the Tax Office warns that sometimes the promised tax benefits may not actually be available under the law.
Anyone considering entering into an arrangement needs to investigate and understand the consequences. Not getting the right information may lead to a tax debt, including substantial penalties and interest. ‘Doing your research and seeking independent financial and tax advice from someone not involved with the arrangement before investing is your best protection,’ D’Ascenzo says.[/callout]
Problems emerge if you are overseas and unreachable as documents may need to be signed by you. A possible solution to this is to receive all communications through email but be sure to check that digital signatures can legitimately be used. Or perhaps use an administrator for the fund as they can be responsible for receiving and processing all your paperwork.
If the central management and control of an SMSF is permanently outside Australia for more than two years, you will not meet the ‘ordinarily’ requirements and your fund may be deemed non-compliant with significantktax consequences thereby arising.
Issue 2: Active member test
A member is classified as active if they are a financial contributor to the fund or if financial contributions to the fund have been made on their behalf.
The ‘active member test’ requires that a fund has either no active members or, if there are active members, that at least 50% of all active members’ assets (either based on market value or the value payable to the member) are attributable to active members who are Australian residents.
It would be poin4less to appoint a legal representative to stand in your place if you breach the active member test.
All in all, the two issues above must be addressed if you are planning to relocate overseas. Be sure to seek professional advice to maintain the residency status of your SMSF.
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