The SMSF Association has identified the residency test for SMSFs as a measure it will be calling on the federal government to reconsider due to the impractical nature of its application.
Speaking at the industry body’s 2019 Technical Day in Sydney last week, SMSF Association head of education and technical Peter Hogan cited a recent situation he encountered as an example of where the test is failing.
In that scenario, a husband and wife had an SMSF with assets of $4 million and were in retirement and so not contributing to the fund. They had included their adult son, who had a small account balance, as a member of the fund as well.
The son moved to the United Kingdom for work and was a British tax resident. While overseas he decided to roll over a small balance he had in a retail super fund into the SMSF.
“He was the only contributing member that year and he was a non-resident. It meant the SMSF failed the active member test and was not classed as an Australian super fund that year,” Hogan noted.
“It blew up the fund and 45 per cent of the parents’ retirement savings was potentially gone because they accepted the rollover. Is that fair?
“I mean it’s clearly not, but that’s the ridiculous state we’re living in.”
He pointed out it is only small super funds such as SMSFs that will experience this type of scenario and added the extent of the problem may not be known.
“It’s an area we do need to address. There is under-reporting of these sort of problems because people just don’t know that that’s a problem and so they’re not reporting it to the ATO,” he noted.
“In my experience a lot of accountants and advisers are unaware of the residency issue and this demonstrates it is a problem area we need to address.”