Self-Managed Super Fund’s must adhere to requirements under the SIS Legislation to ensure the fund is complying at all times. An SMSF’s complying fund status relies on it being an ‘Australian Super Fund.’
There are three tests that determine whether a fund meets the residency requirements and failing these three tests has serious detrimental consequences to your fund.
Test 1: Establishment or assets held in Australia
This is the easiest test to satisfy since you only have to ensure the fund is established in Australia. If this is the case, then you have passed the first test.
Test 2: Central management and control ordinarily in Australia
The second test looks at the strategic and investment-related decision making of the fund. The below decisions must be made by the trustees who should ordinarily be in Australia.
- Formulating the fund’s investment strategy;
- Reviewing and updating or varying the fund’s investment strategy. This includes monitoring and reviewing the fund investment’s performance;
- The fund reserves, if applicable. This shall include formulation of strategy and how the assets of the fund will be used.
By ‘ordinarily in Australia,’ this means it allows someone to make decisions even if temporarily overseas. The emphasis is on the trustee’s intent, substance of the absence and whether the duration is temporary or not. For example, if you leave Australia for an undetermined time and no flight is booked to come home, you may fail the second residency test.
Test 3: Majority of the active assets are held by Australian tax residents
This is only relevant if you have a non-resident member. Non-resident members, cannot be considered as active members if their balance is more than 50% of all the total balance of all active members.
To be an active member, this means you made contributions to the fund or has contributions made to the fund on your behalf.
If you fail to meet the above 3 residency tests, then your fund will be deemed non-complying by the ATO and the following will apply:
- The fund’s total fund assets (minus Non Concessional Contributions) are subject to tax at the highest rate;
- Any income received in the financial year of the breach will also be taxed at the highest marginal rate;
- The member responsible for the breach becomes disqualified as a trustee and may not continue with the SMSF;
- The member responsible for the breach can face serious penalties such as fines paid from personal money and imprisonment.
For further information on SMSF Residency, please view our fact sheet.