What’s unwritten in the federal government’s budget is always more interesting than what is said and published. The October budget was no exception when it comes to the deferred start to relax the residency requirements for SMSFs and small Australian Prudential Regulation Authority funds (SAF)
The original proposal by the previous government on 11 May 2021 was to extend the time fund trustees were temporarily absent from Australia from two to five years. This was to allow trustees to meet the central management and control test and satisfy the requirement that the fund is an Australian superannuation fund for tax purposes.
The 2020/21 budget announcement also proposed the abolition of the active member test, which places restrictions on members of small funds making contributions when they are overseas.
The current government last month announced the relaxed residency requirements for SMSFs and SAFs would go ahead but with a deferral of the start date. While this appears to cover the temporary absence rule in relation to the central management and control test, it is unclear whether the announcement extends to the abolition of the active member test.
For a fund to be treated as an Australian superannuation fund and qualify for taxation concessions, it needs to meet three tests, otherwise it may be taxed at the penalty rate of 45 per cent. The three tests are the establishment test, central management and control test and active member test.
The establishment test is satisfied if the fund was established in Australia or the fund has an asset located here.
The central management and control test requires that significant policy matters are dealt with in Australia. However, under the current rules the central management and control test is met where the trustees are temporarily absent overseas for no longer than two years.
The announcement made by the government on 25 October is to extend the period of temporary absence to no longer than five years. There are no details available on how this will work or when the legislation will be introduced into parliament. However, it will commence at the start of the financial year after the legislation becomes law.
The third test is the active member test, which restricts a member of the SMSF who is overseas and not an Australian tax resident from making contributions to the fund. The test is applied in relation to those members who have contributions made for them.
When at least 50 per cent of the market value or fund value is held by active members who are Australian residents, the test is met and overseas residents can make contributions to the fund. However, if this is not the case and contributions are made by overseas residents, then the fund will not meet the Australian superannuation fund test for tax purposes.
Whether the changes to the active member test proposed in the 2021/22 budget will form part of the announcement in the May 2023 budget is a matter of conjecture at this stage. We will need to wait until we see the draft legislation or further announcements from the current government.
Graeme Colley is SMSF technical and private wealth executive manager at SuperConcepts.