Call to scrap active member test

Active member test

The active member test should be dropped in favour of longer time frames to manage an SMSF from overseas to better reflect changing work patterns, the SMSFA says.

The active member test should be removed and central control and management (CCM) exceptions extended to five years to better reflect current overseas working and travel arrangements, according to the SMSF Association (SMSFA).

The SMSFA stated the active member test did not provide any additional integrity to the superannuation system as the CCM test ensured only Australian funds could benefit from super tax concessions.

It made the comment as part of its 2020/21 budget submission, where it argued the residency rules created an unequal situation for SMSFs compared to other superannuation funds.

“The fact that the residency rules unfairly affect superannuation members who choose to save for retirement in an SMSF but do not affect those who save in a large APRA (Australian Prudential Regulation Authority)-regulated superannuation is inequitable,” it said.

The submission labelled the active member test as an “unnecessary source of red tape, especially for SMSFs and small APRA funds”, which added costs to the superannuation system, and increased costs and created confusion for SMSF trustees.

In place of the active member test, the SMSFA proposed that residency of a fund should be determined on the same principles as all other entities for income tax purposes, such as listed companies and trusts, and be based on the place of establishment and the location of the management and control of the fund.

Alongside this move, it called for the two-year temporary absence exception for the CCM of an SMSF to be in Australia to be extended to a five-year exemption.

“The existing two-year exemption is too short in the context of modern work arrangements, where executive and other staff are often expected to commit to an overseas placement of greater than two years,” the submission stated.

“Extending the central control and management exception will reduce red tape and compliance issues for Australians working overseas while not compromising the integrity of the superannuation or taxation systems.

“We believe that the proposed changes will have a negligible impact on revenue as the changes will cause concessionally taxed contributions to be redirected to an SMSF instead of a large APRA-regulated fund, rather than creating an increase in concessionally taxed contributions.”

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