Regardless of the travel SMSF trustees are planning, their legal obligations associated with running a fund do not cease. Tim Miller highlights the requirements needing to be satisfied and some available solutions.
With the continued popularity and growth of the SMSF market, there is always going to be a significant number of SMSF trustees and members travelling at any given time, both domestically and internationally. The definition of an Australian superannuation fund can be a complex issue for SMSFs with members abroad, but members must also stay on top of their trustee obligations while travelling the vast expanses of Australia.
So what are the issues trustees of an SMSF must take into consideration if they plan on travelling both here and abroad, particularly once they retire?
Australian superannuation fund
For an SMSF to be entitled to the taxation concessions afforded to superannuation funds, it must meet the definition of an Australian superannuation fund. The Australian Taxation Office’s (ATO) Taxation Ruling TR 2008/09 provides a great source of information on the residency issues for SMSFs and expands the definition of what constitutes an Australian superannuation fund, providing further clarity for trustees and advisers on the three tests that need to be addressed to determine whether an SMSF satisfies that definition.
Test 1 – Fund establishment and fund assets
The first test refers to the fund being established in Australia or the assets of the fund being held there. While it is generally accepted the majority of funds satisfy this test, the ATO has provided further clarity on when a fund is considered established.
To establish a fund, a trust deed must be executed. In addition, a contribution must be received by the fund as a cash or in-specie contribution, including rollovers. For the purposes of when a fund is established, the ATO is only concerned with the contribution and this must be “paid to and accepted by the trustees in Australia”. The execution of the deed does not need to occur in Australia. If a fund satisfies this first test, it will satisfy it for all time.
Test 2 – Central management and control
The second test relates to the central management and control of the fund. The fund must ensure the central management and control is ordinarily in Australia. TR 2008/09 focuses on providing clarity on what constitutes central management and control, who exercises it, when are they doing it and where are they located at the time. It also defines the terms ‘ordinarily’ and ‘temporary absence’.
Central management and control relates to the strategic and high-level decision-making processes and activities of the fund, such as:
- formulating the investment strategy for the fund,
- reviewing, updating or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund’s investments,
- the formulation of a strategy for the prudential management of any reserves, and
- determining how the assets of the fund are to be used to fund member benefits.
According to the ATO, day-to-day operations of the fund are not considered part of the central management and control as they are regarded as being administrative in nature. Operational activities include, but are not limited to, acceptance of contributions, payment of benefits and purchasing or redeeming fund investments.
In the ruling, the ATO has expanded on the definition of central management and control being ‘ordinarily’ in Australia. It has determined that there must be some continuity or permanence about where the management and control is exercised to satisfy the ‘ordinarily’ requirement. The ATO will look at the facts to see if the central management and control is usually, regularly or customarily exercised in Australia.
Two-year absence – safety net, but not the only rule
The legislation states the central management and control is ordinarily in Australia even if it is temporarily outside Australia for not more than two years. This provides a safety net particularly for SMSFs, giving them comfort that if their temporary absence is for a period not exceeding two years, then they will not fail the test. The ruling expands the definition of temporarily and establishes the nature, rather than the time, is the main factor when determining whether the absence is indeed temporary. A fund can still satisfy the test if the duration is defined in advance or is related to the fulfilment of a specific, passing purpose, such as an overseas employment contract.
Test 3 – Active member test
The active member test is the third test. A fund with no active members need only satisfy the first two tests. Retired members in receipt of a pension who do not intend or have the capability to contribute will satisfy the active member test.
An active member is one who is a contributor to the fund at the particular time or on whose behalf another person has contributed.
To satisfy the active member test, at least 50 per cent of the assets held by active members need to be held by active members who are Australian residents. Alternatively, the test is satisfied if at least 50 per cent of the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members is attributable to members who are Australian residents.
For the purposes of this definition, contributions include rollovers.
Overseas travel – length of travel and travel intention
As stated above, part of the definition of an Australian superannuation fund is that the central management and control of the fund is ordinarily in Australia, requiring the high-level strategic decisions of the SMSF to be made while the trustees are in Australia or are made while the trustees are temporarily outside of Australia for a period no longer than two years.
An open-ended overseas holiday may therefore not satisfy the requirements as the trustees’ intention may be to return, but the period of absence is not defined in advance.
In the instance of overseas travel, it is necessary for the trustees to determine upfront what their intentions are as they may be required to make alternative arrangements prior to their departure.
A fund with equal trustee representation in Australia and overseas would satisfy the ATO’s requirements that the control of the fund is in Australia, therefore a mum and dad fund with two Australian resident children as members and trustees would meet its obligations of being an Australian superannuation fund.
A fund that doesn’t have an equal number of trustees in Australia as overseas, or no Australia-domiciled trustee, will need to look at alternative arrangements. Rather than winding up or converting to a small Australian Prudential Regulation Authority fund, an alternative could be for at least 50 per cent of the travelling trustees to resign and appoint an Australian resident who holds an enduring power of attorney on their behalf to replace them as trustee. This appointment would result in the appointed person or people having the same trustee power afforded to the member if they were trustee, so the decision to appoint such a person must not be taken lightly.
In the event the member returns to Australia, then they can arrange for the legal personal representative to resign and for the member to be reappointed. A corporate trustee arrangement would make this process less administratively difficult as the fund would be required to notify the Australian Securities and Investments Commission and the ATO of the change in directors, but there would be no need to amend the legal title of the assets held by the fund as they would remain in the name of the trustees.
International and domestic travel – administrative concerns
While overseas travel can present difficulty with the trusteeship of an SMSF, local extended travel can also carry with it administrative issues that need to be addressed. These also apply to trustees overseas on a temporary basis.
The trustees of an SMSF are responsible for the activity of their fund and have an annual obligation to reconcile the fund’s activities for a financial year and lodge the necessary tax and regulatory return with the ATO. Most SMSF trustees outsource the administration of their fund to a specialist SMSF administrator or to their accountant.
This is useful if all the fund’s activities are sent directly to the administrator, but mail collection is only one step in annual reconciliation. There are likely to be unreconciled transactions and confirmation of pensions or possibly contributions for the year. This requires communication between the trustee and the administrator and while much of the information can be determined via various means of communication, there may be some items that can’t be reconciled as the trustees won’t have all their information with them on their travels. Communication may also be difficult or intermittent.
Preplanning can obviously assist with this, such as reconciling with the administrator before travelling, but sometimes this will not be possible because of the time of the year trustees travel versus the lodgement requirements of a fund.
Having an understanding of the lodgement requirements for a fund is a must, so it is important if the trustees intend travelling, they provide appropriate forwarding details to their administrator as they will be required to sign and return their fund’s financial statements and annual return prior to lodgement. An allowance of time is necessary if they are overseas or in a remote location.
Delegating powers – other people to sign
One arrangement that is often put in place as a result of trustees travelling is for other parties to sign the SMSF financial statements, under the misunderstanding that because they have a general power of attorney or even an enduring power of attorney, they do so on the other person’s behalf. This is not the case and the law is specific about how many trustees must sign the financial statements, and in the event of a two trustee fund, both trustees must sign. As indicated above, it is only in the event that a trustee has been removed and replaced by their legal personal representative who holds an enduring power of attorney where this option is acceptable.
Paying your pension on time
A fund that pays a pension must pay the annual minimum by 30 June each year for the fund to be eligible for a tax exemption. If the trustees have not set up and maintained regular periodic payments to meet the pension requirements or don’t have access to Internet banking, they run the risk of their pension ceasing (Tax Ruling 2013/5) and the loss of the exempt pension income deduction.
Conclusion
The trustee of an SMSF can outsource almost all aspects of their fund with the exception of their responsibilities. One of the non-legislative aspects of SMSF trustees travelling is that its purpose often includes relaxation, enjoyment and exploration, and there is always the possibility this will lead to an oversight of the ever-present responsibility that goes with being the trustee of an SMSF. Administrative oversights, non-payment and non-lodgement could all be inadvertent, but that doesn’t remove or reduce the responsibility.
It is therefore important, whatever the reasons behind trustee travel, they understand their obligations and fulfil them or make the necessary arrangements to have them met.
