The SMSF Association believes legislative restrictions effectively compel Australians with an SMSF and who are temporarily living overseas to switch to an Australian Prudential Regulation Authority (APRA)-regulated fund while out of the country.
Association chief executive John Maroney said the definition of an Australian super fund under the Income Tax Assessment Act means SMSF members who continue contributing to their fund while overseas face penalties, as well as having it taxed as a non-complying fund.
“The effective consequence for many SMSF members is being forced to switch to an APRA-regulated fund while overseas and then transferring those contributions back to their SMSF on returning to Australia – a costly and cumbersome exercise,” Maroney noted.
“Aside from the fact that it’s not members’ preference, it creates significant additional costs by having an extra super fund and subsequently transferring the benefit to their SMSF.
“The end result is higher administrative and compliance costs, reducing the super balance.”
The failure to meet the definition of an Australian super fund – it must be established in Australia, fund management and control must be in Australia and it must pass the active member test relating to contributions made to the fund by non-resident active members for tax purposes – means that it is treated as a non-complying fund.
A non-complying fund is taxed at 47 per cent on its taxable income for the financial year and also taxed at 47 per cent on the value of its investments at the start of the financial year it becomes non-complying, less the amount of any non-deductible contributions.
The association proposes that the active member test should be excluded from the requirement for any super fund to qualify for taxation concessions under the income tax law.
“Residency of the fund should be determined on the same principles as all other entities for income tax purposes, that is, the place of establishment and the location of the management and control of the entity,” Maroney said.
“Removing the active member test will ensure that SMSF members who are working overseas can still contribute to their fund where the SMSF balance exceeds 50 per cent of the fund’s assets.
“This will mean that provided the fund was established in Australia and the central control and management remains in Australia, then an SMSF member can contribute to their fund of choice.”