With travel restrictions lifted, Tim’s boss requires him to relocate overseas to London to head up their London branch for an indefinite period up to 5 to 6 years. Tim’s wife, Mary, is relocating with him together with their two children while they rent out their home in Australia. Tim and his family may temporarily return to Australia for holidays and family visits. Tim and Mary are the only members of their self-managed super fund (SMSF) and have accumulated $4M in their SMSF.
While this is a common scenario, many fail to understand that adverse tax can be triggered in relocating overseas for their super.
For SMSFs to qualify for concessional tax rate of 15%, an SMSF must meet the ‘residency test’ (i.e. continue as an Australian super fund) for income tax purposes and for super purposes.
For income tax purposes, a super fund qualifies for concessional tax treatment if it is a 'complying superannuation fund' within the meaning of the Superannuation Industry (Supervision) Act 1993 (SISA).
A super fund is an 'Australian superannuation fund' at a time, or for an income year provided that:
The fund was established in Australia, or any asset of the fund is situated in Australia at that time; and
At that time, the central management and control (CM&C) of the fund is ordinarily in Australia; and
At that time either the fund had no active member or at least 50% of the total market value of the fund’s assets attributable to superannuation interests held by active members and the sum of the amounts would be payable to or in respect of the active member.
Effectively, to be a 'resident regulated superannuation fund' and therefore, a complying superannuation fund within the meaning of the SISA, the fund must satisfy the definition of 'Australian superannuation fund' at all times in the year of income. This means that the fund must satisfy all three tests in the definition of 'Australian superannuation fund' concurrently at all times.
Understanding how each of the three tests applies can be difficult.
Unfortunately, time pressures to relocate, work commitment and establishing one’s family overseas means that many employees relocating overseas do not consider the taxation consequences including seeking appropriate advice and taking appropriate measures to comply with all three ‘residency tests’ to satisfy the definition of an ‘Australian superannuation fund’.
Failing all three tests will result in the super fund being treated as non-complying, and taxed at 45%. For Tim and Mary, if their SMSF failed to meet all three tests, this would result in tax of $1.8M on their $4M super benefit.
If you are relocating overseas for an indefinite period of time, PV Legal can assist your super fund remain compliant for tax and super purposes.
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